50-year Mortgage Proposal Could Reshape U.s. Housing Costs

The idea of the 50-year mortgages flooded the news recently. It is the newest attempt by the Trump Administration to bring down housing costs, but I don’t think it was thought through entirely.

On paper, it seems like a crazy but good idea. 50 years is a long time, but at least it would allow people to enter into the housing market. But as soon as you dive into the numbers, you realize how the 50-year mortgage could ruin the real estate market forever.

Without looking too deep into the subject, most people assume it could be good because there will be lower monthly mortgage payments which would then allow more people to purchase homes. Sure, 50 year years is a long time, but how many people actually stay in their homes for the entire life of their mortgage?

A few things to consider

In order to truly understand how detrimental this may be, we need to look at a few things. First, the length of the loan. 50 years is a long time. The average age of a first-time homebuyer in the U.S. is 40 years old. This means that the average first-time homebuyer would finish paying off their mortgage at age 90.

The biggest argument against this is that the most common loan is the 30-year fixed rate mortgage. On average, people move every 10 to 11 years, so people already aren’t staying for the entire mortgage. Why does it matter if it’s 30 years or 50 years? They have a point. This argument though is all emotions. There are plenty of 90-year-old’s still paying mortgages, and plenty of 80+ year old’s that take out 30-year mortgages.

But that takes us to our second point, affordability. This is where they get you. Right now, people are reporting that the 50-year mortgage would decrease monthly mortgage payments by 15%-20%. This is a huge deal for people. More people would be able to afford homes than ever!

Hypothetically, you take out a 30-year mortgage loan for $500,000 at a 6.5% interest rate and find out the monthly payment is $3,000. If we then run that same scenario again but over 50 years, monthly payments are only $2,600. But this is false. In this scenario, the mistake that is that we are comparing these twp loans at the same interest rate. If a 50-year mortgage did actually come to the market, it would have to be offered at a higher rate than 30-year mortgages.

This is because those extra 20 years are added risk to the lenders. They would have greater exposure to interest rate fluctuations and potential defaults., therefore they would charge more for the loan. This is already a fact. Today, we have many types of mortgages, but the most common are 15 and 30 year. The 15-year rates are almost always 0.5% to 1% lower than the 30-year rates.

The monthly payment scenario

Let’s redo the monthly payment scenario a few different ways. As a reminder, the scenario is a 30-year, $500,000 mortgage at a 6.5% interest rate. Your monthly payments would be $3,078.59. Let’s say the 50-year interest rate was 0.25% higher. Your payment would be $2,818.58. Just over $250 lower than the 30 year.

Now, say the 50-year interest rate was 0.5% higher. Your payment would be $2,913.13. Only $165 lower than the 30-year. And what if it was 0.75% higher? Your monthly payment would now be $3,008.44, only $70 lower than the 30 -year mortgage. It has been mostly agreed on (all speculation) across the board that a 50-year mortgage would have about a 0.5% higher rate than the 30-year. So, we are talking about a $165 difference in the monthly payment.

This is where things get technical

Many people just see the numbers and think, well I would rather have the lower payment, because I’ll be moving in the next 10 years. This is what could potentially destroy the real estate industry forever. The issue with mortgages is that not all mortgage payments are created equally. Loan officers and banks use something called amortization which schedules out exactly how you are going to pay back the bank. Unsurprisingly, the banks want to be paid first, and so a large amount of your monthly mortgage payments within the first 10 years are paying the interest.

Let’s run another scenario. You take out a loan for $500,000 at a 6.5% interest rate. You are going to be moving in 10 years. Which mortgage is going to be better for you? The 30-year mortgage will cost you around $369,000 in those first 10 years. About $79,000 will go towards paying down the principal (which is now equity for you), and the other $290,000 will go towards paying down the interest. The 50-year mortgage will cost you a little less at $327,000 in those first 10 years. About $20,000 will go toward the principal (which is now equity for you), and the other $307,000 will go towards the interest.

Imagine in 10 years when you go to sell your house, and you only had $20,000 in equity. In some cases, you might not even break even because of closing costs.

Now of course, your homes value can fluctuate and give you additional equity, but specifically talking about cash to equity, there is a clear winner and a clear loser.

Still not convinced?

To anyone opposing this and saying that they are planning on buying their forever home and are fine having the 50-year mortgage (which right now doesn’t exist), take heed. With the 30- year mortgage, you’ll have paid back the $500,000 and paid an additional $600,000 in interest by the end of the 30 years. And with the 50-year, you will have paid back the $500,000 and paid an additional $1.3 Million dollars in interest. All of that to save $165 a month.

The legal barrier

The biggest legal barrier is the Qualified Mortgage Rule that was created under the Dodd-Frank Act. The Qualified Mortgage Rule states that qualified mortgages are those “with terms no longer than 30 years.” Along with that, Fannie Mae and Freddie Mac both currently cap loan terms at 30 years, an the FHA and VA both follow those same rule. In order to actually make the 50-year mortgages legal, these laws would have to go through Congress and be changed.

I don’t see anything good about these potential 50-year mortgages. In all the research and interviews I have done about them, I have yet to find one good thing that could come from this. If anything, these 50-year mortgages could screw over millions of people, and destroy the real estate market.

Nick Booth is a real estate agent with Utah Real Estate, in Salt Lake City.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the editor responsible for this piece: tracey@hwmedia.com