The homebuying industry was jolted over the weekend by a President Donald Trump social media post that claimed a 50-year mortgage could be a game-changer for the housing market.
Of course, no other details were announced. Still, the real estate industry’s online community overwhelmingly thought this was a bad idea for house hunters, suggesting the two decades of added borrowing compared with the traditional 30-year mortgage would make modest savings not worth the effort.
Sadly, too many discussions surrounding homebuying challenges lean on assumptions created in a financial era that may never return. Fresh thinking is welcome to me, and I hope new ideas emerge from the debate about how to put financially strapped home seekers in a buying mood.
A top concern from the weekend’s online chatter about a 50-year mortgage is the potential delay in owning a home mortgage-free.
First of all, very few borrowers hold a 30-year mortgage for its full term. Refinancing or other early payoffs – often through a sale – end the mortgage. There’s no reason a 50-year loan would act differently. So, why shouldn’t a buyer grab a few years of savings?
Additionally, consider the current state of ridiculously elevated home prices. Barring a sharp decline in values, paying off the mortgage may no longer be a realistic goal for the typical homebuyer.
Plus, one shouldn’t quickly dismiss savings of “just a few hundred bucks” a month. That’s real money to new homeowners who likely spent almost their last penny to close the purchase.
The numbers
Yes, we have to do some math to show why a 50-year loan is not the worst idea ever.
My trusty spreadsheet examined the costs of a $500,000 mortgage on a 30-year loan at a 6.25% rate, as well as two variations on a 50-year loan: one at the same rate and another scenario with a rate that’s half a point higher, at 6.75%. Some real estate gurus suggest a 50-year loan would carry a significantly higher rate – though I’m not convinced.
The 30-year loan would cost $3,079 a month. At the same rate, a 50-year term would cost $2,725 – saving $374 a month, or an 11% discount. At the higher rate, it’d be $2,913 a month – saving $165 a month, or 5%.
Now with the 30-year loan, if held for those three decades, it’s obviously paid off. But the 50-year deals? $373,000 is still owed at 6.25% after 30 years. It’s $383,000 at 6.75%.
To many folks, that remaining balance is a problem. What is forgotten, however, are the monthly savings generated by the 50-year loan’s lower monthly costs.
At 6.25%, the 50-year-old loan’s $354 a month savings add up to $127,000 over 30 years. That could be $202,000 if invested in a 3% savings account or $698,000 if invested in the stock market, assuming a 10% annual return. These earnings, depending on investment earnings, could help pay down or pay off the mortgage at that point.
This potential nest egg is smaller when eyeballing the 50-year loan with a 6.75% rate. The $165-a-month saved adds up to $60,000 over 30 years, or $94,000 if invested at 10%, or $327,000, assuming 10% annual stock returns.
The dark side
Look, the 50-year mortgage is no panacea for affordability. It might work for a special kind of thrifty buyer.
Fixing housing affordability takes some unorthodox thinking. A 50-year mortgage, if used wisely, could be one tool in housing’s repair kit.
The big question is what most house hunters do with the potential upfront savings. What if the smaller monthly payments are not being saved?
That cash might be used to spend more on the house. A 50-year loan can give a borrower 13% more buying power vs. a comparably priced 30-year mortgage.
This is a risk associated with any financial incentive to house hunters. These deals may benefit a few buyers, but they are likely also to drive up housing costs for all.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com