Over the last month, Donald Trump has been floating the idea of a 50-year mortgage as a means of increasing housing affordability. According to the President, “All it means is you pay less per month. You pay it over a longer period of time. It's not like a big factor. It might help a little bit.”
Is this correct? Could a 50-year mortgage option help ease the housing affordability crisis? And what could it do to the wider real estate market? And how could this affect real estate investors as well as homebuyers?
Is a 50-year mortgage a good idea?
Comparing a 30-Year Mortgage to a 50-Year Mortgage
To see the real impact on mortgage payments and total interest expense, let’s compare a 30-year mortgage and a 50-year mortgage side by side.
Assuming a purchase price of $425,000 with a 20% down payment and a fixed 6% interest rate:
- A 30-year mortgage would cost $2,038.47 per month (not including taxes or insurance) and would incur a total interest charge of $$393,849.84.
- A 50-year mortgage would cost $1,789.78 (not included taxes or insurance) and would incur a total interest charge of $733,865.78
Therefore, a 50-year mortgage could save you around $248.69 per month, but would cost $340,016.31 more in total interest expense.
However, there are a few issues with this calculation:
- Interest rates on longer loan terms are typically higher. So if a 30-year fixed is 6%, you might have to pay 6.5% for a 50-year loan. This would result in a $1,916.64 mortgage payment and a total interest expense of $809,982.45.
- You’re not likely to retain the loan for the full 50-years. There’s a very real chance that you would sell the property or refinance the loan before the end of the loan term, so it’s unlikely that you would repay the full interest amount (although refinancing incurs fees and can reset the loan term to a fresh 15, 30, or 50 years, which could result in even greater overall expense, even if you secure a lower interest rate).
- This calculation does not reflect the slower rate of equity accumulation in a 50-year loan. The amortization schedule of all mortgages allocates more of the early mortgage payments to interest than to principal. The longer the loan, the longer it takes to make any real dent in the principal loan balance. For example, on a 30-year mortgage, after five years of mortgage payments, your loan balance would be $24,071.57 from where you started. On a 50-year mortgage (even if the interest rate were the same as the 30-year), after five years of mortgage payments, your balance would only be $6,385.01 less than when you started. So you would have a riskier debt-to-equity ratio and less equity to borrow against or cash out in the event of a sale.
Potential Benefits of a 50-Year Mortgage
Here are the reasons why some Americans are in favor of the 50-year mortgage plan:
- Lower monthly mortgage payments. Depending on the size of the loan, you could save a few hundred dollars per month by going with a longer loan term.
- Lower barrier to entry. The lower mortgage payments may help more buyers qualify for their first home loan.
Potential Downsides of a 50-Year Mortgage
Opponents of the 50-year mortgage plan point out several possible disadvantages of the strategy, including:
- Higher overall interest expense. A 50-year loan would add hundreds of thousands of dollars to the cost of the loan.
- Longer debt repayment period. You would be less likely to have your home paid off by retirement, when your income may dip as you pull from retirement savings. And fewer homeowners would be able to repay the loan during their lifetime, which could lead to generational debt.
- Slower equity building. Because so much of the early payments goes toward interest, it could take decades to build substantial equity.
- Doesn’t treat the cause of the affordability crisis. The housing crisis is a supply and demand issue. Until we build more housing units to meet the demand, housing will continue to be unaffordable.
- Home prices could actually rise. Lower monthly payments increase buyer purchasing power, which could drive home prices up rather than make homes more affordable.
- Housing turnover could fall. With equity taking so long to build, homeowners may need to stay put longer, which can stagnate the housing market.
Sustainable Real Estate Investing Made Easy
A 50-year mortgage could help individual homebuyers get on the property ladder. But the cost of doing so would be extremely high. And if the 50-year mortgage were to become a common alternative to 15 and 30-year mortgages, it could result in higher home prices, followed by lower turnover, which is bad news for everyone operating in and around the housing market.
Gatsby Investment has always been in favor of sustainable real estate growth. We believe in generating strong returns for investors by adding value to the market through new developments, rather than restricting inventory to artificially inflate property values.
Our real estate investment strategy is to create housing units in areas with persistent shortages (like Los Angeles). Our multi-family developments, for example, add much-needed housing in in-demand neighborhoods. These developments often generate double-digit returns for our investors while helping to ease the local housing shortage. This model of sustainable growth prevents prices from rising out of control to the point of driving locals out of the area.
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