A 50-Year Mortgage Is A Terrible Idea; But So Is The 30-Year Mortgage

There is a useful discussion at National Public Radio on the recent proposal from the Trump administration to expand the traditional 30-year mortgage to 50 years. The article is called, 3 questions about Trump’s 50-year mortgage plan. I have a fourth question: WTF? The 30-year mortgage is bad enough. I’ve been inveighing against it now for at least two years. In one post partially titled Critique of the Mortgage Program, I suggest that we begin looking at different models to create ownership. One big problem with the 30-year mortgage is households pay a huge amount of interest up front and must depend on broader housing inflation to avoid being underwater. The idea of lengthening the time period of the loan is a terrible idea.

First, let’s consider the good questions in the article.

How do the numbers look on a 50-year versus 30-year mortgage?

According to an expert interviewed for the post, Joel Berner from Realtor.com, who looked at a $400,000 loan at 6.25%, “a 50-year loan would save at most about $250 per month compared to the 30-year loan.”

But if one uses a basic mortgage calculator to consider the true cost of the $400,000 home, one would also be in complete shock: 600 monthly payments totaling $1,177,141.12! And that leads to NPR’s next question.

Why would a bank want to offer a 50-year mortgage, and why would a buyer want one?

Berner says in the NPR post, “lenders certainly benefit too by having a longer period to charge higher interest rates.” Obviously, lenders might consider such a long payout because they get all the interest up front. The problem as I’ve pointed out before is that when interest is front loaded, the balance doesn’t go down very much.

If the home appreciates at about 3% a year, after year 15, the home would be worth $623,000 with a balance of $334,000. If the house was sold, that could yield a payout of about $289,000. But after 15 years, almost every other house would have appreciated too if in the same market. To buy a comparable home, the household would have to come up with almost $300,000. The only option would be yet another long-term mortgage.

Could other changes help ease the housing crunch?

The NPR article quotes Berner as saying, “this is not the best way to solve housing affordability.” Of course it isn’t, and he rightfully points to increasing supply as the best way of ameliorating price pressures. More inventory means a more competitive market which benefits people looking to buy a home using a 30-year mortgage. But even that eventuality means things aren’t good for home sellers, and if appreciation drops to less than 3% because there is a ton of supply, the length of time for a seller to get back any money from a sale gets longer.

My question: Could this make things much worse?

The answer is yes. The inherent problem with the 30-year mortgage in the first place is that it is already a sort of silly idea. There is no way any lender would make a loan to a person earning 100% or even 150% (about $100,000 to $150,000 in a city like Cleveland, Ohio) of Area Median Income for an asset that is worth 3 to 4 times the purchasers entire annual income. Any underwriter would find this a bridge too far. The answer? Have the federal government back the loan or even better, buy it and securitize it. To make monthly payments realistic, make the terms very lengthy, really a long time, say, 30 years. This is a boondoggle in the first place and what’s amusing is that the Trump plan isn’t really that outlandish at all – the 30-year mortgage is outlandish enough.

The 50-year mortgage would simply put more people in a position to afford monthly payments today, without consideration of whether those households would be in a position to make those monthly payments 5, 10, or 15 years from now. With so much interest on these loans, families would be trapped in what amounts to an endless series of payments over a period that would extend into old age. But because of the illusion of affordability created by low monthly payments, there would be a surge to buy, creating, yes, inflation, which would boost prices.

The 50-year mortgage is helpful to illustrate what’s wrong with the 30-year mortgage; for the sake of fueling purchase of single-family homes, the government has created a policy of unrealistic and hazardous lending that puts the whole economy at risk. The lives and the economy changes, and monthly payments are too difficult, mortgages don’t get paid, and the whole financial system feels the shock. The answer isn’t extending the length of mortgages, but finding a better way to finance ownership.