The Trump Administration angered the internet with the announcement that 50-year mortgages have been approved as a concept. The justification for the policy was to make it easier to buy a home, but the outcome of this policy is more akin to the dystopian mantra: You will own nothing and be happy.” Except, of course, the happiness is unlikely.
Doing The Numbers
The monthly payment on a mortgage depends on the loan principal (amount borrowed), the interest rate, and the term length. A 15-year mortgage typically has a higher monthly payment than a 30-year one because you’re repaying the same principal in half the time, which means larger installments to cover both principal and interest more quickly. However, this comes with the benefit of paying far less total interest over the life of the loan.
Below are calculations for a $300,000 principal under two scenarios.
Scenario 1: Same Interest Rate (6% Annual for All)
Mortgage Term | Monthly Payment | Difference from 30-Year | Total Payments Over Term | Total Interest Paid |
|---|---|---|---|---|
15 Years | $2,531.57 | +$732.92 (41% higher) | $455,682.60 | $155,682.60 |
30 Years | $1,798.65 | Baseline | $647,514.00 | $347,514.00 |
50 Years | $1,579.21 | -$219.44 (12% lower) | $947,526.00 | $647,526.00 |
The 30 year mortgage paid more than double the interest of the 15 year mortgage. The 50 year mortgage paid 300000 more in interest than the 30 year. However, the value proposition of the 30 year mortgage is that the monthly payment, in the above example is 41% lower. This amount is substantial for the average American family. Moreover, even at a 6% interest, that $732.92 is better off invested in the stock market than paying down the extra principal. But the difference of $219.44 with the 50 year mortgage is insubstantial.Â
Scenario 2: Typical Rate Differences (5.5% for 15-Year, 6% for 30-Year, 6.5% for 50-Year)
Mortgage Term | Monthly Payment | Difference from 30-Year | Total Payments Over Term | Total Interest Paid |
|---|---|---|---|---|
15 Years | $2,450.66 | +$652.01 (36% higher monthly). | $441,118.80 | $141,118.80 |
30 Years | $1,798.65 | Baseline | $647,514.00 | $347,514.00 |
50 Years | $1,713.32 | -$85.33 (5% lower monthly). | $1,027,992.00 | $727,992.00 |
Even in the theoretical scenario, the monthly payment was only nominally lower, but in a more realistic scenario, the difference is extremely minute. To compound how useless a 50 year mortgage is, PMI has not even been factored in yet, and 100% of people who would seek a 50 year mortgage need PMI. The PMI on a longer term would be higher as it carries more risk, reducing the 5% in monthly savings.
Bottom line, if you can’t afford a 30 year mortgage, you can’t afford to buy a house.
Glorified Rent
Currently, the housing market has shifted to where renting is, in many cases, more optimal than buying, where previously it was cheaper to buy than to rent. The housing market has changed. Interest rates are higher.
A 50 year mortgage achieves very little equity within the lifespan of most mortages. Even if we used a benchmark of 7 years, the equity obtained is less than 3%, an amount that would be eaten in closing costs upon the sale of a home.
Moreover, the equity position obtained by appreciation is not a guarantee. During really low interest periods, it was easy to make money in real estate, but now, many people are priced out of homes and some sellers are indignant about their equity positions, causing houses to stay on the market even longer. 50 year mortgages will compound this issue, because it will make homes harder to sell, or force people to sell and lose money.
Lastly, the cost of homeownership is more than just principal, interest, insurance, and taxes. The maintenance on a home cannot be overstated, and it comes with routine costs. A renter can typically rely on the landlord for these responsibilities. But there are added costs that should be budgeted when making a decision between renting and buying a home.
Externalities
Continuing on the point about maintenance, the downgrade of a neighborhood has consequences beyond just one family. And to be brutally honest, the type of person who needs a 50 year mortgage will also not be the person to best maintain a property. This will have lasting consequences on the properties, neighborhoods, and future housing markets.
Moreover, the availability of giving unqualified buyers even more access to capital could cause housing prices to go up for all working class Americans, whilst rent rates lag behind. 30 year mortgages certainly allowed home prices to go up more easily, although it’s not guaranteed the impact of adding the 50 year mortgage would have a substantial impact, but this is, nevertheless, an externality that should be considered.
Is A Home An Asset?
Robert Kiyosaki, the author of Rich Dad Poor Dad, famously argued that your home is a liability, not an asset. He teaches that an asset is something that provides cash flow, which a home does not. One of his rebuttals is that people sell their homes to buy another home, and thus never realize complete home ownership. A 50 year mortgage would exemplify the point that these people will never actually own their homes outright but be minority shareholders who don’t receive any dividends.
Cash flow is the most important metric in business and family budgeting. So while Kiyosaki is not advocating against homeownership, he simply wants people to increase their cash flow and think accordingly.
Conclusion
There is a housing crisis in America, mostly fueled by overpriced housing. One might think that the supply can simply be increased, but regulation and the incentive to maximize margins on new houses, shows that the supply side is not where the solutions ought to be found. Rather, the demand side is where solutions are readily available through simple public policy most Americans can understand.
The way to alleviate the housing costs is to reduce the demand. The way to reduce the demand is deporting 100 million immigrants, legal and illegal. Just like that, housing will become affordable since fewer people are chasing the same amount of goods. This is what the American people, Evangelicals especially, voted for.
50 year mortgages do not mathematically make sense, and to make matters worse, they provide fuel to the fire of the financially reckless in this country. These people will own nothing, happiness optional.
2 Responses
The banking system, as it functions, is a criminal enterprise. Neither central bank money creation nor fractional-reserve (private) money creation should exist.
Whatever the term of your mortgage, make sure there’s no penalty for prepayment. Then do so, if at all possible. We’ve twice turned a 15 year mortgage into a 6 year mortgage. The only exception would be if your mortgage interest rate is lower than you can earn in guaranteed interest, such as a 3% mortgage today.