The Pitfalls of a 50 Year Mortgage

A relatively new lending instrument on the scene is the 50 year mortgage. A 50 year mortgage takes the traditional 30 year mortgage to entirely new levels for potential home buyers. The 50 year mortgage allows home buyers to take advantage of the market. They can buy a bigger house and pay a cheaper monthly payment for it. While it can be helpful in certain circumstances, there are pitfalls associated with it as well. Here are some common drawbacks associated with the 50 year mortgage. 

Less Equity

When you sign up for a 50 year mortgage, your primary concern is usually getting a bigger house for a cheaper payment. However, with those benefits comes the trade-off of accumulating less equity. When you amortize a loan over the course of 50 years, the vast majority of your monthly payment will be interest. With so much money going towards interest every month, a very small percentage is going towards the equity in your home. When you compare the process to a 30 year mortgage, you will be accumulating equity at a much slower rate. After 20 years of payments, with a 30 year mortgage, you will have built up quite a bit of equity. After 20 years with a 50 year mortgage, you are not even halfway towards your goal of owning the home. 

Building equity in your home is a tried and true way to help build personal wealth. If you do not build home equity, many experts say that you will be destined to live paycheck to paycheck for the rest of your life. Therefore, a 50 year mortgage is not ideal according to many financial experts. 

Higher Debt

Getting a 50 year mortgage can allow you to get a home with a higher home value than you would normally qualify for. With this type of mortgage, it typically encourages people to buy a home that is more than they can afford. For example, let's say that you are considering buying a $150,000 home with a traditional 30 year mortgage. The payment that you would have to pay is around $1000 per month. You decide that that amount is a little more than you want to spend. Then you become aware of the 50 year mortgage and find out that you could get a $250,000 house for around the same payment. While it seemed like more than you wanted to spend before, now the option is a lot more enticing. You can get a house with all of the features in it that you want for the same payment.

Many people talk themselves into a payment that they are not comfortable with just because of the house that they can get with the 50 year mortgage. This causes them to overextend themselves beyond what they would consider normally because of the extra incentive of the nicer house. Getting in over your head and agreeing to make that payment for the next 50 years can be a big mistake that can lead you to financial disaster.