Mortgages that can outlive you

By Liz Pulliam Weston

Mortgage lenders will tell you that every type of home loan has a niche -- that it's good for someone, in other words.

When it comes to 40- and 50-year mortgages, though, it's hard to imagine whom.

These ultra-long-term mortgages don't reduce monthly payments all that much when compared with a traditional 30-year fixed-rate loan. What Methuselah loans do, though, is jack up how much interest you pay over time and dramatically slow down the rate at which you build equity.

Compare costs

Over five years, 40- and 50-year mortgages cost more in interest and build up less equity than do most other loans. Here's a comparison of the different costs for a $300,000 mortgage.

These loans also generate media coverage -- something lenders need right about now. As interest rates rise and the mortgage industry consolidates, lenders are looking for new products to excite borrowers' interest.

"We're all trying to figure out ways to get people's attention," said Anthony Hsieh, president of LendingTree.com. "Option ARMS, hybrids and interest-only (mortgages) have all had their time in the spotlight. Forty- and 50-(year mortgages) are next."

Six loan types compared

Loan type	Interest rate	Monthly payment	Compared to 30-year fixed loan	Interest paid*	Equity created*
5/1 Interest Only	6.29%	$1,572.50	($367.32)	$94,350	$0
5/1 Hybrid	6.29%	$1,854.96	($84.86)	$91,443	$19,855
15-year fixed	6.32%	$2,583.73	$643.91	$84,415	$70,609
30-year fixed	6.72%	$1,939.82	$0.00	$97,922	$18,467
40-year fixed	6.97%	$1,857.76	($82.06)	$103,220	$8,245
50-year hybrid	6.97%	$1,798.18	($141.64)	$103,908	$3,983

Note: *Over 5 years. Source: MSN research

40-year loans becoming more common

At this point, 50-year mortgages are more a novelty item than anything else, since they're offered by only a handful of lenders. Some experts have compared them to the 99-year mortgages that were briefly offered during Japan's ill-fated real-estate boom two decades ago.

Forty-year mortgages, on the other hand, first appeared in the 1980s and then finally gained a toehold in the marketplace last year after Fannie Mae began buying them. (Fannie Mae and Freddie Mac buy the majority of mortgages in the U.S. and repackage them for sale to investors, so their stamp of approval is hugely important.) About 5% of mortgages in the U.S. now carry 40-year terms.

Some 40-year mortgages offer fixed rates for the entire term, typically charging about one-quarter percentage point more than a comparable 30-year mortgage. Other 40-year loans are hybrids, with a rate that's fixed for a few years before becoming variable. (The few available 50-year loans are also hybrids that typically turn variable after five years or so.)

The slightly lower payment could be enough to help you qualify for a somewhat bigger loan, but mortgage experts say they're also pitched as an alternative to interest-only or option loans. Interest-only and option mortgages typically build no equity and, in the case of option loans, can cause homeowners to lose equity by increasing the size of the mortgage over time in a phenomenon known as negative amortization. (For details, see "The world's worst mortgage" and "Could you handle an interest-only loan?")

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Video: Weston on ultra-long-term mortgages

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Forty-year mortgages are typically sold to "the individual who says, 'I don't like the 30-year, because the mortgage payments are a little high," Hsieh said, "'and I don't like interest-only because I've been told I need to build some equity.'"

50 years on the edge?

The problem with building equity so slowly, particularly in the expensive markets where these loans are often touted, is that you may not have much of a cushion if real-estate trends turn against you.

"You're really renting the house and hoping for the market to create equity for you," said Keith Gumbinger, vice president of financial publisher HSH Associates.

While that's worked in the past, there's no guarantee the party will continue. If the market doesn't cooperate and prices plateau or fall, these homeowners could be in trouble, particularly if they've made only a small down payment.

"After five years, you don't have enough equity (built up) to even cover the sales-commission cost if you decide to get up and go," Gumbinger said.

As the chart above shows, homebuyers probably have better options. If they think they'll sell within a few years, a five-year hybrid loan could reduce interest costs and build equity for a similar-size payment. If they expect to be in the home much longer, the 30-year loan may be a better bet.

If there's any chance you might hold this loan to the bitter end -- in other words, that you'll make every payment until the term ends, rather than moving and refinancing -- then you'll really want to opt for the shorter-term loan. You'll pay a total of $398,334 in interest for a 30-year, $300,000 mortgage over the course of the loan. For a 40-year, the interest cost is nearly 50% higher: $591,725.

"Any time you borrow money," Hsieh said, "you want the cheapest interest rate you can get and the shortest term you can afford."

Real strategies that work

Many borrowers, though, have lost sight of the true costs of various mortgages as they pursue the lowest-possible monthly payments or try to qualify for ever-more-expensive homes. If this describes you, you might want to:

• Consider your goals. For most people, homeownership is a way to build wealth. If real-estate appreciation slows, though, the market won't be building wealth for you: you'll need to do it yourself, by paying down equity.

• Match the mortgage to your time horizon. You can help protect yourself from soaring interest rates by making sure your rate is fixed at least for as long as you plan to remain in the home.

• Settle for less house. Stretching yourself too thin to buy a house is a recipe for disaster. Even if no major systems break down, the routine costs of maintenance and repair can swamp anyone who's not prepared for them, as I wrote about in "The hidden costs of homeownership." Meanwhile, too-high house payments might cause you to stint other important goals, like saving for retirement, or to pile up credit-card debt as you try to stay afloat. Do yourself, your finances and your blood pressure a favor by making sure you pick a house you can actually afford.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.