I can't believe the amount of Loan Officers doing 40 & 50 year mortgages. When I analyze and question why I get the typical answer "it gives the borrower a lower payment." These are the same folks that don't like the Pay Option Arm because "The borrower doesn't pay down the balance on their home, so the loan can't be good."

I'll admit, if one pays the minimum payment on the Option Arm, they have potential deferred interest (I say potential because it depends on how many years they've already paid). But saying a 40 or 50 year mortgage is better because it also pays down the balance is crazy. Don't believe me, let's run some real numbers.

We'll use a $200k mortgage amount and a 6.0% rate. P&I payments on a 40 year fixed is $1100; on a 50 year it's $1052; an Option Arm with a 2.95 payment rate is $837.

After one year of payments, the borrower has paid $13,205 on a 40 year; $12,633 on a 50 year and $10,044 on the Option Arm. "Yeah, but the 40 & 50 year loan are whittling down the principle." Oh really? Let's see after 1 year of payments, the 40 year principle reduction is $1,238; the 50 year is $651. So yes, technically, there is principle reduction for each. But what good does that do the borrower? If cash flow was the issue, gaining equity in the home shouldn't be. Do think the borrower is happy about gaining $651 in equity after paying $12,633? Is that a wise decision? At least with the Option Arm, there is an extra $2600 they've kept in their pocket to use of other reasons for that same year.

Yes, I know, I'll get the argument "Well, they are paying down SOME principle, isn't that what a mortgage is supposed to do?  The Option Arm can't claim to do that." Come on folks, PLEASE don't use that argument in this situation. Here's why, do you honestly think the borrower will stay in that house for 40 years? If the answer is "no", then ask yourself what's the real reason to offer this type of product?

I'm not saying a 40 or 50 year is a good or bad mortgage. I'm saying if you're a Loan Officer and are selling them, do it for the right reasons. Really think about what you're selling and if it's truely benefiting the borrower.