Think you can’t afford a home? Are real estate prices in your area out of control? Will the mortgage payments be too high?
The White House thinks it may have a solution: A 50-year mortgage!
The idea came about during a discussion between President Trump and federal housing official Bill Pulte. It was made public via a post on Truth Social, and then later discussed during an interview with the president on Fox News.
While on the surface it may seem like a longer loan term would make buying a home more affordable, the reality suggests otherwise. In fact, it might end up being a raw deal that puts you on the hook to pay hundreds of thousands of dollars more with barely anything to recoup once you eventually sell the property.
Here are five reasons why you might want to avoid a 50-year mortgage if it ever comes to fruition.
1) A Higher Interest Rate
The first thing to expect about a 50-year mortgage is that the interest rate (sometimes advertised as the “APR” although this is not exactly the same thing) would likely be higher.
For example, the current national interest rates are:
- 6.34% for a 30-year fixed mortgage
- 5.69% for a 15-year fixed mortgage
In general, if we assume the difference between these two loan products is approximately 0.5% to 1.0%, then the hike on the interest rate for a 50-year mortgage would most likely put the range between 6.8% to 7.3%. Ouch!
Why the higher interest rate? It has to do with the way bonds and loans work. Both are instruments of debt where the borrower agrees to pay the lender back by some pre-determined date.
As this payoff date goes further into the future, the lender takes on more risk that the borrower might default. Therefore, the lender wants a higher interest rate to cover this risk and make the deal more attractive.
To summarize, the longer the loan term, the higher the interest rate.
2) Greater Total Interest Paid
More bad news about interest on a 50-year mortgage: Not only would the rate likely be higher, but you’ll end up paying a lot more in overall interest over the life of the loan.
How much more? A LOT MORE!
For starters, just compare the two names: a 30-year versus 50-year mortgage. Intuitively, we know that 20 extra years of mortgage payments will mean 20 more years of interest payments. However, the exact amount might surprise you.
For instance, consider a $400,000 home with a traditional 20% down payment ($80,000). Using a simple online mortgage calculator, borrowing $320,000 via a:
- 30-year mortgage with a 6.3% rate results in $393,057 of total interest.
- 50-year mortgage with a 7.0% rate results in $835,242 of total interest.
That’s over double the value of the $400,000 home and twice the interest of the 30-year loan!
To further illustrate the contrast, a 15-year mortgage with a 5.7% interest rate would result in $156,775 of total interest. As you can see, when it comes to mortgages, the shorter your loan, the less you’ll pay to the bank over time.
3) Only Slightly Lower Payments
In theory, spreading the payments out over 50 years instead of the traditional 30-year term should make them smaller, right? This is why many people opt for a 72 or 84-month auto loan instead of a 48 or 60-month one.
Unfortunately, the math doesn’t math the same way for mortgages. Using the same mortgage examples as above, the monthly principal and interest (P&I) charges would be:
- $1,980.71 for a 30-year mortgage.
- $1,925.40 for a 50-year mortgage.
That’s not a miscalculation or a joke. The similarity in payments is due to the higher interest rate and additional $442,185 in interest you’re paying for 20 extra years of payments.
To make things interesting, let’s be generous and say that by some miracle a 30-year and 50-year mortgage have the same interest rate (6.3% in our example). If that was the case, the new monthly payment for the 50-year mortgage would reduce to $1,755.87.
Yes, that would shave a little over $200 off the monthly payment when compared to the 30-year mortgage. But in my opinion, that’s not a dramatic enough savings to justify having to pay an additional $442,185 in interest.
4) Less Equity
Another important concept that may be lost on some borrowers, especially those who are unfamiliar with how mortgages are structured, is the progression of building equity.
Equity is the portion of the house that belongs to you. For example, when you buy a home with a 20% down payment, essentially 20% of the house belongs to you and 80% belongs to your lender. Since each house payments goes towards both the principal and interest, the idea is that over time you’re slowly building up equity until the mortgage is eventually paid off in full.
However, there’s a catch. Because of the way mortgages are structured or “amortized”, the proportion of interest to principal is on a sliding scale that’s biased mostly towards interest in the beginning. It’s not until years later, often decades, that this sliding scale begins to shift so that more of your payment goes towards the principal.
To give this some context, if you entered into the 50-year mortgage above, after 40 years of making payments, you’d still owe $164,877 on the house. That means on the $320,000 you borrowed, only approximately half has been paid back despite 40 years of responsible payment making.
That’s going to be a problem. Considering most people move every 10 to 15 years, under a 50-year loan structure, they’d essentially have almost no equity built despite having made payments every month. Essentially, almost every dollar went towards the interest and benefiting the lender.
5) Generational Debt
As you might guess, not truly “owning” your home after decades of paying back the lender is a going to be a problem for many households.
In the past, retirees were often encouraged to pay off their homes before entering into retirement. Upon their passing, these older generations would often leave the property or its sales proceed to the younger generations in their will.
Unfortunately, with a 50-year mortgage, this will be unlikely. A 30-year buying a home today would theoretically not finish making payments until they were 80 years old. If they unfortunately passed away at 70 years old, then using the example above, approximately half of the home would still need to be paid down. That means less equity and less money in the hands of the heirs.
This situation gets worse for older homebuyers. Someone in their 40s or 50s might have hardly any principal paid down by the time they pass away. Potentially that might result in almost no property or proceeds being left to their loved ones.
Stick with a 30-Year Mortgage
It’s not easy to hear, but there’s currently no good solution to America’s housing problem. The supply continues to remain stagnant, interest rates are high, and prices are persistently elevated.
The only thing I can suggest is to control what you can actually control:
- Save up. Keep your budget in check and stash anything extra in your house fund.
- Keep your expectations in check. Forget about where your family and friends are living. Look for houses suit your needs and are at your price point.
- Be patient. Don’t give up! Though you may not find the perfect house tomorrow or even a month from now, one will eventually come along.
Even though the 50-year mortgage probably isn’t a good idea, what’s helpful is that people are starting to recognize home affordability in the U.S. is a problem that’s not going away. With some luck and patience, perhaps another idea can be put on the table that will do more to move the needle in way that benefits both homebuyers and lenders alike.
Featured image credit: Pexels
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