Refinancing a mortgage extends the amount of time it will take to pay off the loan and lowers the amount of each monthly payment. But do the savings pay off in the long run? Today show financial editor Jean Chatzky has some thoughts.
The 50-Year Mortgage
MATT LAUER, co-host:
Nick and Angela Malillo have lived in their Rancho Cucamonga home for the past five years.
Mr. NICK MALILLO: We bought the house when the market was pretty low. We paid 270 five years ago, and the house--another house in this neighborhood just sold for $750,000. And we had a 30-year loan.
LAUER: So with their expenses on the rise thanks to their three-year-old son, they decided to re-finance their home choosing a mortgage option banks are now offering for the first time...
Mr. MALILLO: What was the total monthly savings?
Mr. ALEX DIAZ Jr. (Statewide Bancorp, Inc.): Total monthly savings is $729 a month.
LAUER: ...a 50-year mortgage. They'll be paying off their loan for half a century.
Mr. MALILLO: Sounds good.
Ms. ANGELA MALILLO: Sounds good to me.
LAUER: The upside: They're saving over $700 a month.
Mr. MALILLO: We can do get a lot of stuff with that. We've got a three-year-old...
Ms. MALILLO: (To son) You go count.
Mr. MALILLO: ...and the way gas prices are right now. I'm paying about $500 a month anyways just in gas. So we're still coming up a little bit.
LAUER: In most cases the interest on the 50-year mortgage is fixed for the first five years and fluctuates based on the market for the remaining 45.
Mr. DIAZ: It's a great product to put people in homes, and also it's a great product that--for you as a current homeowner if you're looking to consolidate some debt to take advantage of a longer-term loan so you could keep your payments low.
LAUER: But Jim Nabors from the National Association of Mortgage Brokers offers this warning.
Mr. JIM NABORS (National Association of Mortgage Brokers): What makes it a bad choice for a great majority of Americans is the savings per month is so minimal that it doesn't pay when you compare it to the extra 20 years, thousands of dollars in interest you'll pay over the long term.
LAUER: So is a 50-year mortgage right for you? Jean Chatzky is TODAY's financial editor.
Hey, Jean, good morning.
JEAN CHATZKY reporting:
LAUER: This, you know--`You can pay me now or you can pay me later.' I mean, depending on the savings, is this one of those situations where 30 years from now you're going to go, `Wait a minute, we're still in this mortgage?'
CHATZKY: Well, this is a misconception. When they're talking about paying this loan over 50 years very, very few people are actually going to do this. What they're looking to do is reduce their monthly payment for the first five years, and somewhere along that five years, refinance, get out of this loan and get into something cheaper because we've seen such less expensive rates over the last few years. People are just hoping e they come around again.
LAUER: All right, so let's talk about we--in the piece there we mentioned that generally with these types of packages or loans, the rate is fixed for the first five years and then it fluctuates over the market values over the next 45. What's the general starting rate for these mortgages right now?
CHATZKY: Right now about 6.6 percent. Now, you've got to do sort of an apples-to-apples comparison. They are being made as 5/1 adjustable rate mortgages. If you compare the rate on a 30-year 5/1 adjustable rate mortgage, you can get in at about 6.4 percent. These are a quarter of a percentage point higher.
LAUER: All right, and let's actually flush that out with some real numbers.
LAUER: All right, we've got some graphics. So compare these products for me.
CHATZKY: On a $275,000 loan, which is about average right now, on a 6.4, you'll pay $1722 a month. If you go all the way up to a 50-year loan, you're going to pay about $140 more a month, and over the five years that'll...
LAUER: A hundred and forty dollars less a month.
CHATZKY: ...less a month. Excuse me.
CHATZKY: Over the five years that'll save you a little more than $8,000.
LAUER: OK, now, does this mean this is the best way for me to find the least expensive monthly payment?
CHATZKY: In fact, no, it doesn't. If instead of going with a 50-year you were to go with something called an interest-only mortgage--which is just like it sounds, you pay just the interest and you pay no principal until that mortgage starts adjusting--you'd actually save about double that, about $15,000 on those first five years because you could lock in at a lower rate.
LAUER: However, comma, there's a fairly large risk side to those particular loans.
CHATZKY: Exactly. With the 50-year mortgage you do pay back some principal. You pay back very little principal but you do pay back some principal. With an interest-only in that first few years, you do not pay back any principal. And so what people are worried about is the possibility of what they call negative amortization, or being upside down. Owning--owing more on that loan than you actually borrowed or that the home is worth.
LAUER: The fact that we're doing a story on this and that people are talking about this and they're being offered to home buyers out there, there must be a reason for it, OK?
LAUER: They wouldn't offer them for no reason. So, is this a marketing gimmick? What is it, a way to get people in the door?
CHATZKY: Absolutely, it's a way to get people in the door. Right now mortgage lenders are in a precarious spot. They've hired a lot of people because of the refi booms of the last couple of years, they've got a lot of money to lend and they've got nobody or at least very few people coming in the door. And so they're saying, `Hey consumers, we know you're feeling a little squeeze. We know like the people in the piece that idea of saving a few hundred bucks a month sounds pretty appealing to you. Come on in, let's talk about it.'
LAUER: And if you go for this 50-year mortgage, as you said, very few people are ever going to pay it out over the 50 years. You probably would refinance it. Is it any more difficult or any easier to refinance this type of a mortgage?
CHATZKY: No, if rates fall again the refi boom will kick in and you'll be able to go back in as long as your credit is good. And of course that's something we talk about all the time.
LAUER: Exactly right, and do your homework on something like this.
LAUER: Make sure you know what you're getting into. Jean Chatzky, thanks very much.
Math & Statistics Activities:
What is the difference in price between the newly-sold home and the home the Malillos bought, expressed in dollars?
Expressed as a percentage?
How much are the Malillos saving a year?
What is the difference in interest rate between the 30-year mortgage and the 40-year mortgage?
What is the difference between the 30-year and the 50-year mortgage?