Really easy money! Or is it?
Published September 18, 2006
You want to buy the house. You really want to buy the house. Trouble is, the softening of home prices across the U.S. hasn't reached this house on this street. So you can't afford this house, even with a mortgage that spreads out your payments over 30 long years.
Of course, if you take on one of these innovative 50-year mortgages that you've read about recently in the papers, well, you could be living large. The envy of your friends. Better, the envy of the snide brother-in-law who predicted that you wouldn't amount to squat. But, a 50-year mortgage? Payments for half a century? Or as the Tribune's Mary Umberger sardonically put it in a recent story, just 600 monthly payments and the house is all yours.
These semi-eternal loans are now available across the country. Not a lot of people are grabbing them--yet. Finance types say these mortgages, like "interest only" loans that don't require you to pay down principal, can be a terrific way to learn about a horror called "negative amortization." In essence, that's all about owing more, not less, on your home as time passes.But the monetary risks of 50-year mortgages don't interest us as much as the implications for living the American dream. Or just for living.
Most of us aspire to be homeowners. But if the mortgage-burning party is five decades off, are you really a homeowner? Or are you a perpetual home buyer, a hapless candidate for the lead role in a real estate remake of "Failure to Launch"? Put another way, would you conclude over time--you'd sure have plenty of that--that you had jumped up to your ears in debt in order to foolishly live beyond your means? Yes, conventional mortgages produce some of that anguish. Every borrower endures the occasional bout of insomnia as the monthly payment-due date approaches.
What most of us don't do, though, is embrace with a bear hug the notion that debt is our most loyal companion, now and forever. Granted, debt-free in 50 years is still debt-free. But a 28-year-old wouldn't know that bliss until age 78, when she might be shopping for a prime location, location, location in assisted living. Yet why stop at 50-year mortgages? Why not 75? With American life expectancies now nicely into the 70s for both men and women, we could issue mortgages to newborns and, a lifetime later, combine mortgage-burnings with wakes:Dust thou art, crinkly loan documents, and unto dust thou (and thy homeowner) shalt return.
For some borrowers with special needs or unorthodox credit histories, 50-year mortgages may make sense. Suppose you want a lower monthly payment, you don't plan to stay put for very long, and a chorus of angels promises you that the value of your new house is guaranteed to increase. If that's your story, then accepting a super-long-term mortgage for a short time might help you through some tight years.But you need to ask those cherubs tough questions about how much you can expect your home to appreciate. The Wall Street Journal reports that while many homeowners have enjoyed big run-ups in recent years, the historical average is that home prices rise only about 2 percentage points a year faster than inflation.
And that which has gone up can come down. Long-range historical averages tend to reassert themselves, sometimes fast and viciously.S o if you're counting on the supposed investment return from a house to justify overborrowing in order to acquire it, well ... angels would never fib, would they?
Buying a house isn't just a financial transaction, of course. Owning four walls and a roof gives you somewhere to live. Then there are the intangibles--the glad-to-be-here sensation, the gradual accumulation of memories--as a house becomes a home. Those are arguments for stretching to buy the house you desire, even if it costs more than the house you can comfortably afford. You'll have to decide this for yourself. If you weigh all the factors and conclude that long-term indebtedness would give you more happiness than worry, maybe you're a candidate for the 50-year mortgage. Still, that phrase "weighing all the factors" gets more lip service than it does unpleasant evaluation of the serious risks that come with being financially overextended. Walk too close to the cliff's edge and a stiff gust of wind can push you into the abyss. It's that powerful realization which nudges most Americans toward buying houses they truly can afford.
A few Americans, though, are accepting the burden of a long-term mortgage because its comparatively lower monthly payments buy them more house. Simple as that. If you still don't know what to do, here's your dilemma reduced to its essence: Do you want to own the house? Or do you want the house to own you