When I first heard someone talk about a 50-year mortgage I thought they were kidding. Then someone explained that the 50-year mortgage allowed them to buy a bigger home. My question is, is the bigger home worth the extra cost?

With a $200,000 mortgage at 7.0% the 50-year loan will cost you almost ¾ of a million dollars for that $200,000 home. You will pay 361.0% of your original loan for your home. Most people today take a 30-year mortgage. For the $200,000 loan at 7.0% you pay 239.5% of the original loan. And if you shorten the mortgage only 5 years you will only pay 212.0% of the original loan.

Years	50	30	25
Monthly payment	1,203.38	1,330.60	1,413.56
Total interest paid	522,009.95	279,021.94	224,066.89
Total all payments	722,009.95	479,021.94	424,066.89
% of Original Loan	361.0%	239.5%	212.0%
Monthly payment savings %	10.6%	6.2%	9.7%
Monthly payment savings $	127.22	82.96	137.04
Annual cash savings	1,526.64	995.52	1,644.48

Unfortunately most people do not look at the total cost. They look only at the monthly payment. The question always becomes how much can you afford a month. When you look for a new home the real estate salesperson will be most happy if you are “pre-qualified.” This means that you have applied for a mortgage and the mortgage lender has given you the total mortgage dollars you can borrow based on your current income and dollars you have available for the deposit. The salesperson will then show you homes within that price range.

As the above chart shows if you can only afford a monthly mortgage payment of $1,330 they will suggest that you take the 30-year mortgage to obtain the $200,000 and be able to buy the larger home. They will come up with great points: the home is in a better school district; it has all the things you want right now; there is room for your family to grow; and the list continues. But is the $82.96 per month really worth paying $479,021.94 for the total $200,000 loan?

Real estate professionals will explain that the average home is sold every 7 years, so you’ll never pay the total $479,021.94. However, with a 30-year loan in 7 years you will still owe $182,295.31 (91.1% of original loan amount) and you have already paid $111,770.40 for the loan.

Years	50	30	25
Total 7-years payments	101,083.92	111,770.40	118,739.04
Balance 7-years	196,035.00	182,295.35	173,335.80
% of Original Loan	98.0%	91.1%	86.7%

 If someone convinces you that you need a bigger, better, more extravagant home they might suggest you use an even longer period to pay off the loan. If you get a 50-year mortgage, the monthly payment only drops $127.22 a month. And for that privilege you will pay a total of $722,009.95 for the $200,000 investment.

But, but . . . you say. “I’m not going to live here for the rest of my life.” Okay, if you sell the home in 7 years you will still owe $196,035.00 (98.0%.) You will never build any equity except the increase in market value. Based on the problems we are seeing in today’s housing market you might have a bit of trouble getting what you paid 7 years ago. Now the only extra you have is what you originally had for a down payment. This will only give you enough to purchase a home similar to your current one, unless you have either saved a substantial amount of money or originally made a large down payment on the first home. So why go through all the hassles of moving? Not only are there moving costs, getting used to new surroundings and changing the kids school, but you also need to add the closing costs for both the old and new homes.

When we continue saying we cannot afford something someone might suggest we get an interest only loan. There is one lender that calls the loan a “Smart Choice” loan. Using a 7% interest only loan, your payment drops to $1,166.67 per month. The big problem with these loans is that the principle never goes away. You just keep on paying $14,000 forever for the “pleasure” of using someone else’s money. Oh, you’re right. That’s not your pleasure the lender has the pleasure of collecting your hard earned money and putting it into their already fat pockets. To me, it sounds like the smart one is the lender.

This is why I typically suggest that people pay off all debt. This allows you to become your own banker. Yes, you will need to practice delayed gratification. But when you can totally afford something, the purchase is twice as sweet. First, you get what you want. Second, you are paying much less than your neighbor who is in debt up to their eyeballs. At this point you own your life. You are not just paying rent for a lifestyle where you are most likely one to two paychecks from being evicted.

Now that sounds smart.

Joy