Half-century mortgages build equity too slowly

by Center for Personal Finance editors

NEW YORK (6/20/06)--Shortly after 40-year mortgages gained a toehold in the market, a handful of lenders started offering 50-year mortgages. The concern with these half-century products is whether you'd have much of a cushion if the real-estate market goes south (MSNMoney.com June 14).

It's predicted that many young home buyers--who grabbed interest-only and payment-option adjustable-rate mortgages (ARMs) to take advantage of lower monthly payments--are at risk of foreclosure in coming years. Now, 50-year mortgages are marketed as a rational way to avoid interest-only or payment-option adjustable-rate mortgages (Bankrate.com April 27), but these ultra-long mortgages aren't necessarily the answer.

When you're borrowing money, the general rule of thumb is to shop for the lowest interest rate and the shortest term you can afford. Having access to a crystal ball helps, too.

If you expect to sell within a few years, ask the credit union which mortgage product makes sense; in this case, a five-year hybrid loan may cut interest costs and help you build equity for a similar-size payment. A 30-year mortgage, though, may make more sense if you expect to be in the house much longer.

These strategies will help keep you on track:

Make sure you know the true costs of various mortgage products. Don't let low monthly payments cloud your judgment to the extent that you're not building equity.

Fixed-rate mortgages protect you from soaring interest rates.

Don't buy more house than you can afford. Factor in the costs of maintenance and repair before you commit to a monthly payment.

Make sure your mortgage payment doesn't cut into your ability to save for long-term goals such as retirement.