I’d assume 30 years was chosen since that would get it paid off by retirement. But my thinking is that since houses are generally non-depreciating, your goal doesn’t really have to be paying off the loan, but merely staying ahead. And a longer term would decrease the payments, making it easier to stay ahead.
Is this reasoning flawed? Is there some breakeven point in the math or something that makes this not work?
Interest build-up. As it stands, most people are paying more, or at least nearly as much, in debt service than in reducing principal, thanks to the marvels of compound interest. Use Excel’s handy debt amortizer to calculate out what payments would be and what parts are principal and interest for varying spans of years.
When I was working for the group digitizing Wake County’s real property records in 1959, I microfilmed the recorded certification of the payoff of a 40-year mortgage entered into in 1958 – the folks had faithfully paid their $50 or so a month for 40 years to get ownership of their home, now worth about $350,000!
I recall that during the 1970s, when mortgage rates were at their highest, some Canadian banks were issuing 100-year mortgages to make the payments affordable.
Mortgages work by balancing off the monthly payment with the overall amount of interest paid. In these days of very low mortgage interest, 10-year loans are easy to find. When interest rates are highest, you’ll never see one.
30 years seems to be a good balance between the two, but home mortgages really haven’t been around for that long so really long-term trends in them are hard to come by.
And homes only appreciate in certain areas. In many, many cities - and even inner-ring suburbs - the value of homes has indeed depreciated.
Oops! :o
There are “interest only” loans currently being touted. Ads, articles about them in the papers, etc. There are “infinite” loans, you never pay down principal.
The suckers, umm, I mean “fine folks” who get these think that they can get a nicer house than they could afford. Hey people, you just said you couldn’t afford it, stop right there and think!
Clark Howard of course thinks they are a bad idea.
The thought came to mind because, obviously, they’re a bad idea. Almost as bad as renting. Yet given that I currently rent…
The interest rates we’ve seen most of the last 40 years, the difference in monthly payments between a 30 yr and 60 yr mortgage would be very slight.
When interest rates were at their peak (around 1980 IIRC), a $100,000 mortgage, at 16% APR for 30 years would be a payment of $1344.76. At 100 years, that would go all the way down to $1333.33. So someone could save a whole $11 a month by extending his payments by 70 years.
Your calculations are correct and my memory of the reasons for a 100-year mortgage seem to be off. (It was a quarter-century ago.) I couldn’t find a mortgage calculator that would take a 100 year time period, but I did find this calulation:
http://www.thecreativeinvestor.com/ViewTopic9071-7.html
The extra time past 30 years does not give you the monthly savings I mentioned, but may be useful for other reasons.
As a trip around Google shows, 100-year mortgages are becoming common in various countries
I wouldn’t do it myself. But I wouldn’t buy a million dollar house either.