There is a new proposal to develop a 50 year loan product to “turbocharge” the housing market and make it more affordable. How realistic is this proposal? What would a 50 year mortgage look like for consumers? What is the fundamental flaw in the analysis by the media? Will this new 50-year mortgage drastically alter affordability and increase the housing market?
What is the 50-year mortgage proposal?
In another attempt to make homebuying more affordable, President Donald Trump floated the idea of a 50-year mortgage in a social media post. In response, Federal Housing Finance Agency director Bill Pulte, who oversees Fannie Mae and Freddie Mac, posted that they are “working on it,” and that it would be, “a complete game-changer.”
The purpose of a longer-term mortgage would be to lower the monthly payment for homeowners. The longer the term of the loan, the smaller the principal needed each month to pay it off in full.
What do the numbers say regarding a 50 year mortgage?
As the saying goes, the numbers do not lie, I did a simple calculation of a 30 year mortgage (360 payments) compared to a 50 year mortgage (600 payments) and the savings were miniscule.
Note, there is a fundamental flaw that almost every mainstream media outlet has made when discussing the 50 year mortgage. There must be an adjustment to the interest rate. In my analysis I did adjust the interest rate for the 50 year vs 30 year mortgage as if you look at the 15 vs 30 year mortgage there is about a ½ percentage difference so I assumed for 20 more years to lock in a rate it would be about .75%. Until we see how the market prices, this is a safe assumption, but note the spread might be greater for the risk of a fixed rate of 50 years. It is important to note that there is absolutely no way that a 50 year rate would be the same as a 30 year rate due to the interest rate risk.
As you can see from the calculation, the savings would be at best around 56/mo. I find it hard to believe that 56 dollars a month on a 500k house is going to move the needle at all for housing affordability.
Is a 50 year mortgage a good idea?
A 50 year mortgage is a terrible idea. It will do nothing to help with affordability. Furthermore, in a 50 year mortgage during the first 10 years of the loan little if anything is going to principle so anyone with a 50 year mortgage is basically renting the property with little equity gained during the first 10 years. Long and short, there is no benefit to consumers as rates on a 50 year would be higher (think of a 15 year vs a 30 year mortgage) leading to little if any monthly savings. In my calculation above the savings were about 56 dollars a month which is nothing compared to the extra interest you would pay holding the mortgage for an additional 20 years.
Will a 50 year mortgage turbocharge the housing market?
Unfortunately the answer to this question is also a resounding no. A 50 year mortgage will result in minute savings that will not move the needle at all on affordability.
A 50 year mortgage is a terrible idea
A 50 year mortgage is a terrible idea whose risks will far outweigh any benefits to consumers and do nothing to turbocharge the housing market. Furthermore there will be huge risks to whomever is buying the mortgage and also to taxpayers that presumably will guarantee the mortgage similar to the 30 year mortgage. If consumers have basically little to no equity built up in the first 10 years, if/when a default occurs the loan to value will be substantially higher than a 30 year where more principal is being paid down. This will lead to higher losses for the noteholder along with all of us, the taxpayers. Long and short, although a 50 year mortgage sounds great, once I ran the numbers there is no way this product makes sense for anyone. I would recommend the government focusing on the fundamentals like the budget deficit to decrease mortgage rates across the board.
Additional Reading/Resources:
https://www.fairviewlending.com/mortgage-rates-one-year-from-now/
https://www.fairviewlending.com/fed-drops-rates-why-did-mortgage-rates-barely-budge/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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