To help potential homeowners get mortgage payments that meet their individual budgets, some mortgage lenders are getting creative by offering 45- to- 50-year loans.
And, while some in the industry say these types of longer-term loans help people to afford houses that might otherwise be out of their price range, others caution that these loans are no bargain.
“I’m entirely against this,” said Deborah Ford, a finance professor at the University of Baltimore. “They’re only looking at the mortgage payment per month and not at what they’ll be paying in interest over time. If they sell or end up in trouble, they’ll have a lot less equity in the house.
“The people who are doing it are likely to be the ones who shouldn’t do it — people with low incomes taking out high mortgages. They can barely meet their payments, so when the furnace blows up they have no money.”
Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers, said that while this loan trend began on the West Coast, it has indeed become popular in Maryland and throughout the mid-Atlantic region.
“A lot of these loans are created to help people meet their budget needs in terms of the their mortgage,” Shaner said. “As home prices go up and people still want that home they have to get a little creative with their traditional home mortgage.”
While Shaner said that the upside to longer-term loans is lower monthly payments, homeowners are carrying more in total dollars and contributions to the home’s equity is greatly decreased.
He said that this could put owners in a pinch when they try to sell their homes.
Victor Acosta, a mortgage lender with Prosperity Mortgage, said that what homeowners need to know is that if they complete payments for the entire loan, they will be making as many as 600 payments, instead of the typical 360 payments, and it would be years before they would see a significant impact in principal.
However, he said that with housing prices increasing and income levels lagging longer-term loans may be the only option for some homeowners. He added, though, that changing market conditions could cause some problems.
“In a market, currently, that has started to stabilize if they try to sell the house they may not have enough equity to close,” Acosta said. “For buyers that know they’re not going to sell house for 10 years, this may be a good idea, but I would recommend something short term for those looking to sell the property in a few years.”
