A recent statement by Federal Housing Finance Agency Director Bill Pulte that the Trump Administration is considering implementing a 50-year mortgage to ease the housing affordability crisis has attracted widespread attention.
Most home loan borrowers currently opt for 30-year mortgages even though a variety of shorter-term products such as 15-year and 20-year mortgages are available.
The tradeoff, of course, is that the shorter the mortgage, the higher the monthly payment — all other things being equal.
Although we would expect that most people would prefer to pay off the debt as quickly as possible and thus free their homes from the tentacles of the evil lender, the homebuyer does not always have enough cash to pursue such an aggressive strategy.
Hence, many homebuyers opt to reduce their monthly payments in favor of longer-term mortgages so that they can free up their extra cash for enjoying such things as three meals a day or a filled gas tank.
If you borrow $500,000.00 at an interest rate of 6% for a term of 15 years, then your monthly payment will be $4,129.28.
Over the course of the next 15 years (if you make no prepayments of any additional interest and do not lose title to your ex-spouse and his or her wild pack of ravenous lawyers), you will make a total of 180 payments and pay $259,471.15 in interest over the term of this loan.
But if you work as an ice cream scooper in an ice cream store, you may decide that the 15-year mortgage is a little too pricey for you.
As a result, you might opt to borrow that same $500,000.00 at the same 6% interest rate but spread the payments over 30 years instead of 15 years.
The advantage of this approach is that your monthly payment drops from $4,129.28 to $2,997.75. The good news is that you now have an extra $1,131.53 in cash each month that you can apply toward your on-going efforts to complete your leveraged buyout of JP Morgan Chase.
The disadvantage is that the longer 30-year term means that you will make mortgage payments for an additional 15 years and, in the process, pay a total amount of interest (again assuming no prepayments or ambushes by family lawyers) of $579,190.95 — which is $319,719.80 more than you would have paid under the 15-year scenario.
By the time you finish paying the 30-year loan off, you will no longer be the bright-eyed, vigorous 30-something borrower that eagerly signed the mortgage documents but instead a somewhat less energetic, cognitively-impaired 60-something borrower who may have difficulty remembering where his or her house is located.
Enter the proposed 50-year mortgage.
The possible adoption of such a financial instrument raises numerous concerns, not the least of which is whether any house having a 50-year mortgage will last for the entire 50 years. More to the point is whether a 50-year mortgage would do very much to improve housing affordability.
In short, does a 50-year mortgage provide a real solution or is it merely a financial gimmick being offered by a government that has no coherent plan to make housing more affordable.
First, let us assume that you as a bright-eyed, vigorous 30-something borrower have decided to bet on your own longevity and opted to finance the purchase of a house with the newly unveiled 50-year mortgage.
So you go ahead and borrow that same $500,000.00 at 6% for 50 years and do not make any prepayments.
By the time you make the last payment on your 80-something birthday, you will have paid $1,079,214.38 in interest.
The good news is that you would have lowered your monthly payment from $2,997.75 under the 30-year mortgage to $2,632.02 under the new 50-year loan.
This monthly savings of $365.73 might be enough to cover the price of two one-day tickets to Disney World with enough cash left over to pay for two sets of mouse ears and a couple of hamburgers and drinks.
The bad news, of course, is that you would have spent an additional 20 years making mortgage payments on a house that may be little more than a disintegrating firetrap when the mortgage is satisfied.
Going from 30 years to 50 years of mortgage payments also means that the total amount of your interest payments will increase from $579,190.95 to $1,079,214.38 — a difference of $500,023.43.
So the sad fact is that a longer mortgage does not necessarily make much difference in your monthly payments once you go beyond 30 years.
Extending the term of the mortgage another 20 years has an almost negligible effect on the monthly payment.
Another point that we have avoided in our examples is that longer term mortgages tend to have higher interest rates.
Even though we have assumed a 6% interest rate in all of our examples, it is very likely that the 30-and 50-year mortgages will have slightly higher interest rates (e.g., 6.5% and 6.75%). These higher rates will certainly affect the differences in the monthly payments.
In short, the 50-year mortgage doesn't address housing affordability because it merely prolongs the mortgage term by an additional two decades over the existing 30-year mortgage and offers little in the way of monthly payment relief.
Government planners would do better to focus on basic factors that result in higher home prices such as restrictive zoning practices that reduce housing density (thus increasing land costs) as well as rising labor and material costs.
Jefferson Hane Weaver is a transactional lawyer residing in Florida. He received his undergraduate degree in Economics and Political Science from the University of North Carolina and his J.D. and Ph.D. in International Relations from Columbia University. Dr. Weaver is the author of numerous books on varied, compelling subjects. Read more of his reports — Here.
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