Laura Rowley Money & Happiness

You, too, can own a home in California -- with 600 easy monthly payments! Just get a 50-year mortgage! With any luck, you'll have paid it off before you die!

A few lenders in California recently introduced 50-year adjustable-rate mortgages. The headline on the USA Today story was: "Need to keep house payments low? Try a 50-year mortgage." This may be the worst possible way to portray this marketing ploy from the slowing mortgage industry.

"I can't really find a viable circumstance where this product really fits somebody," says Keith Gumbinger, vice-president of the financial publisher HSH Associates. "But desperation breeds innovation."

Little -- If Any -- Budget Stretching

The 50-year mortgage won't keep monthly payments very low because it's not really a 50-year mortgage at all. It's an adjustable-rate mortgage with a 50-year amortization (meaning it's paid off after 50 years). The interest rate is fixed for the first five years, then moves up or down thereafter, meaning the monthly payment fluctuates as well. Want to stake your financial life on the fate of interest rates over 45 years? As the first George Bush used to say: "Wouldn't be prudent."

But let's ignore the interest-rate risk for a moment and look at this "low payment" proposition. Gumbinger ran the numbers, based on a $100,000 mortgage, and current interest rates.

"The monthly payment on the 50-year mortgage would actually be higher than it would be on the 40-year, because the (higher) interest rate overwhelms the (longer) term," Gumbinger explains. Even if the 50-year mortgage is available at the same interest rate as the 40-year, the monthly payment would be $575.80 -- a whopping $21.09 a month less. That's not a whole lot of budget-stretching.

Principal Problem

I called Greg McBride, senior financial analyst at Bankrate.com, and we had some fun figuring out what someone would pay in interest over the life of a 50-year loan. This requires a few (admittedly wild) assumptions: The borrower qualifies for a 6.5%, 50-year mortgage; interest rates remain steady at 6.5% for the next five decades; and the buyer remains in his home for that period. Someone who takes out a 50-year, $300,000 mortgage will repay $300,000 in principal and $714,000 in interest over the life of the loan. That compares to $382,000 in interest for a 30-year fixed-rate loan, and $543,000 in interest for a 40-year fixed-rate.

"If someone is truly going to be in a home for that long of a period, the 40-year is a much better choice, because you can carve the payment in stone," McBride says. On the 50-year adjustable-rate product, you're betting the house on the future of interest rates for decades to come.

Now, let's say the home buyer is planning to move after five years. He figures he'll take out a 50-year mortgage, save on monthly payments for five years, then sell.

Unfortunately, when it's time to move, the homeowner has barely chipped away at the loan balance. For example, at the end of the five years, someone with a 30-year, $300,000 loan has repaid $19,000 in principal; someone with a 50-year mortgage, less than $5,000, McBride calculates.

If the home doesn't appreciate, or falls in value, the buyer faces rising monthly payments he may not be able to afford, and he can't sell the place for more than he owes on the mortgage. He has to write a check to the lender to get out of the home. (Oh, silly me, this is a ludicrous scenario, because real estate always goes up, doesn't it?)

Not an Edge for the Average Person

I admit the 50-year mortgage is superior to an interest-only loan under the above scenario because $5,000 in home equity is better than negative equity. On the 50-year mortgage, a borrower may get a shock at the five-year mark when his rate adjusts upward. But he won't get the double whammy of a higher rate coupled with paying principal for the first time. But both are awful loans for the average homebuyer, especially at a time when the air is seeping (gushing?) out of the housing bubble.

Now, I can just hear someone arguing that it's better to get a 50-year loan to get a foot in the real estate market than to rent; even if the house doesn't double in value, the buyer would enjoy that terrific mortgage interest tax break. The reality is that the only people who benefit substantially from this tax break are people in the highest tax bracket, who live in the highest-tax states, who can play the arbitrage game between the cost of their mortgage debt and the interest they are pulling down on other investments.

That would be investment bankers in New York, heart surgeons in California -- people in the 40 percent tax bracket. These are not folks who need a 50-year mortgage because they can't afford the monthly payments on a 30-year. For the average Joe or Jill in, say, the 28 percent tax bracket, the mortgage interest deduction means you pay $1 in interest to get 28 cents back. Not so terrific.

Rent vs. Buy

Rather than get a 50-year mortgage, rent, and invest your cash in stocks and bonds. But it costs the same to rent, you argue, so I should buy and have something to show for my money!

Well, I did all those rent-vs.-buy calculators on the Web before I bought my house. Unfortunately, the calculators didn't include the $80-an-hour plumber to fix the ancient pipe that burst in the attic; the cost of the new appliances; the astronomical utility bills; the ladder, the lawnmower, the rakes, snow shovels, patio furniture, and the other assorted junk you have buy with a house. In certain markets anyway, it's way more expensive to own vs. rent. On the other hand, I love my home. Because I bought it with the quaint notion that I would live in it, maybe even for 50 years.

The funniest part of the 50-year mortgage pitch is that the product will allow more Californians to buy in a market where the median-priced home is around $550,000. Let's review the definition of median: Half of the homes cost more, half cost less. Anybody remember the Monty Python skit "We Were Poor"? "There were 160 of us living in a small shoebox in the middle of the road...." Which is pretty much what $550,000 will buy you in a nice neighborhood in San Francisco.