The Craziness of Backing a 50-year Mortgage

The White House says it is considering backing a 50-year mortgage to help alleviate the home affordability crisis in the country. Bill Pulte, grandson of a corporate home builder founder, and present director of the Federal Housing Finance Agency, said that a 50-year mortgage would be “a complete game changer” for home buyers.

It would certainly be a game changer, but a terrible one for buyers. The longer the loan, the more it costs a buyer in overall payout. That’s due to a much higher percentage of your money going to interest compared to principal. The announcement drew immediate criticism from policymakers, social media, and economists. They agree that a 50-year mortgage would do nothing to resolve the core problems in the housing market: lack of supply and high interest rates.

The 30-year mortgage became the default way to buy a home thanks to FDR and the New Deal. Politicians at the time wanted to create a standard mortgage that most borrowers could pay off during their working years, when the average lifespan for an American was just 66 years.

Today’s average lifespan is 79 years, meaning one would have to buy their first home by the age of 29 to avoid post-death debt. Failure to pay off the mortgage prior to death would fall on one’s children as both wealth and debt gets passed down. While selling of the home would likely cover any remaining debt, the extra interest in a 50-year mortgage is money that the estate, and its heirs, will never get to use for their own wants in life. The bankers will appreciate it, though.

To make matters worse, even though a mortgage of 50 years would reduce the monthly payment by about 10%, it would also bring more buyers into the market, further disrupting supply and demand. The result of that would be even higher home prices, possibly canceling out the 10% lower payment. Common sense should be obvious here. A potential 10% lower payment with 67% more payments is a terrible concept that only a banker could love.

According to the National Association of Realtors. the average selling price of a home in the U.S. was $415,200 in September. With a standard 10% down payment, and an average interest rate of 6.17%, the monthly payment on a 30-year mortgage would be $2,288 while the payment on a 50-year mortgage would be $2,022. A borrower would pay an additional $389,000 in interest over the life of the 50-year mortgage, or about the original cost of the home. That’s also presuming the bank would not require a higher interest rate - a standard practice due to risk factors of a longer loan.

It would take 30 years before a borrower would accumulate a paltry $100,000 in equity, compared to the 13 years it presently takes. A 30-year loan generally means one pays at least twice the cost of a home. A 50-year loan would mean at least triple.

In a free society, it should probably be an option. However, it’s an extreme and financially stupid option that no president should ever endorse.

Source used: Associated Press