Published in August 2006 in 9 Bay Area Newspapers' Sunday Supplement.

Will the 50-year Mortgage fit the Bay Area Market?

Bay Area residents are hyper-aware of the rise and fall of the real estate market. Cocktail and dinner party chatter inevitably migrates to the theme of the high cost of housing; and battle tales of couples who have taken a shot at buying a home pop up as diligently as mini quiches. Some are success stories, and many of those happy endings entail some creative financing and maneuvering, from TIC to joint ownership. Well now prospective home owners have yet another implement to consider adding to their arsenal. It’s called the 50 year mortgage.

 While the 30-year is still the staple of most mortgage structures, according to a report last month in USA Today, some small lenders are now offering 50-year adjustable-rate loans. This option is most appealing to buyers who need to keep payments low in the current volatile economic environment.

Most banks have had 40-year mortgages on the menu for quite some time already; they make up approximately 5 percent of all home loans, the report said.

 So this phenomenon is set to sweep the nation, but will it fly here in the Bay Area? According to James Holloway, a realtor for Zephyr at their Noe Valley office, the answer is a big resounding, “No!” He feels that the prolonged mortgage just doesn’t fit the local buyer. “In my experience, SF residents usually move after 5 years...so people are not going be in their homes for the length of time necessary to make that worthwhile,” he explains, “Like any fixed rate mortgage, it’s usually going to be higher in cost because usually you’re paying a premium.” And the only way to make that premium pay off would be to occupy the house for a very long term – perhaps even the entire 50 years. “You’d have to be planning to raise your kids, send them off to college and then retire, all in the same house,” Holloway expounds. That model is not typical for the Bay Area market, where residents relocate for a myriad of reasons, from upgrading properties to expanding family size. The lengthy mortgage would hamper flexibility, tying the buyer down. “If you know you’re buying a condo and moving up into a house, for example, this will not work for you,” the realtor illustrates.

Another drawback is the fact that a borrower with the 50-year mortgage builds equity extremely slowly. Paula Ryan, owner of San Francisco based Guarantee Mortgage, calculated a typical 50-year mortgage scenario as a $300,000 loan at 6.5%. In that case, the homeowner would pay about $200 less per month as opposed to a typical 30 year loan. However, the owner would end up “paying a lot more interest in the long term. If our goal is to own you property free and clear, it’s not the way to go,” Ryan explains. The crux of the problem is that the principal, the initial sum of money borrowed before interest is added, will not be paid down.

This mortgage structure is new, but Ryan believes that’s not the sole reason that she has yet to receive any related inquiries from clients or even offers from banks or lenders. “this formula would be probably geared toward someone with pretty bad credit who couldn’t get a conventional mortgage; maybe someone with a lot of credit card debt,” she adds.

So, while the issue is extraordinarily fresh on the real estate market, and much remains to be seen, the initial prognosis seems to be negative, at least for the fickle Bay Area real estate scene. Nonetheless, buyers will certainly keep their  radar primed for this new blip on the home market screen. After all, when it comes to venturing into the uncertain world of mortgages, the arms race is alive and kicking.

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