50-year mortgages won’t solve the housing problem

Trump is pushing 50-year mortgages as an answer to home affordability. Given his track record, it’s a safe bet that anything Trump is selling is a bad investment.

“The appeal of a 50-year mortgage is simple: Home prices are near all-time highs, leaving many aspiring buyers priced out of the market. A longer payback period would lower monthly payments and give more people a foothold in the market.

“But the extended time horizon also has major downsides. Homeowners will build equity much more slowly and could, ultimately, end up on the hook for almost double the interest they’d pay compared to a standard 30-year mortgage.”

So how does the math work out?

“Take a buyer of a $415,000 home, which is around the median price in the US. If they put 20% down and received today’s average 30-year mortgage rate of 6.22% over 30 years, they’d pay $2,038 a month in interest and principal. Over the course of three decades, that works out to about $734,000, with $402,000 of that going toward interest.

“Over 50 years at the same interest rate, their monthly payment would fall to $1,802 a month, but their total payments would rise to $1.08 million, with $749,000 going toward interest.

“But even that gaping difference in long-term costs fails to account for higher rates on the longer loan. A 50-year mortgage rate — and, therefore, total interest payments — would almost certainly be higher compared to a 30-year mortgage to account for the risk that comes with a longer time horizon. The difference can be large. While 30-year mortgage rates averaged 6.22% last week, rates on the shorter 15-year mortgage were around 5.5%.”

I suppose you could start with a 50-year mortgage, then refinance to a 30-year (or less) mortgage after five years once your salary picture improves. But none of this solves the real problem—housing supply. And the article doesn’t mention the role of private equity in buying up housing.


“Monthly payment size and total interest costs aside, 50-year mortgages also carry an additional downside if they catch on: Any initiative designed to boost homebuyer demand without addressing the housing supply also risks driving up home prices, Realtor.com senior economist Joel Berner said in a statement.

 

“The ‘savings’ from 50-year mortgages may be totally negated by rising home prices,” Berner said. “This is not the best way to solve housing affordability.”


https://finance.yahoo.com/news/the-math-behind-trumps-50-year-mortgage-gambit-lower-payments-now-but-almost-double-the-long-term-costs-204039206.html

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