Posters have made good points, but from a purely financial standpoint a 50-year mortgage generally makes more sense for the buyer than a 30-year mortgage IF each has the SAME low (e.g. 5%) fixed interest rate. (In practice, I suppose the choice will be between 30-year @6% and 50-year @7%. In that case most of this post should be ignored.)
Even with zero inflation, the present value of future money is less than that future amount. The homebuyer will have more money to spend or invest now. Investment will be good if it outperforms the 5% interest.
And if we assume 3% average inflation, 5% nominal interest becomes 2% “real” interest. And many pundits are predicting more inflation shocks or even major devaluations of fiat currencies in the not-too-distant future. In fact dollar devaluation is a specific goal of Trump’s trade policies. Now MIGHT be a good time for long-term borrowing.
I paid off a 30 year mortgage in under 20 years by putting a little bit more towards the principal every month. 50 bucks here, 100 bucks there. If you can’t put at least a little bit more towards the principal it means you bought more house than you can afford. Which seems par for the course for a lot of people.
I have a feeling 50 year mortgages might come with a mandatory life insurance policy. And who knows what that will cost as years go by.
Plus things like PMI might be permanent as buyers don’t get equity for decades.
If younger people have truly been priced out of the market, then the only solution is to add more housing supply. Clearly you have some aesthetic issue with “half-million dollar McMansions”, but in terms of livable space and maintenance costs they’re much more land-efficient than a 1950’s 2/1 starter home.
Moreover, putting cheap loans in the hands of resident-homesteaders will decrease the tendency for speculators to maximize square footage, and encourage building of the type and size of housing that best meets the needs of residents. Existing “McMansions” would see prices fall as a result of the added capacity.
We can quibble over what type of housing needs to be built, or the best way to incentivize that, but the only real way out of the housing crunch is to build more housing, and the best way to do that is to encourage building over buying.
It’s hard to argue about this, but I’d just point out that once everyone gets panicked about the inflation bomb over the horizon, and decides to YOLO themselves into indebtedness on the assumption that the real balance will be inflated away, that’s a really good recipe for putting a match to the tinder of inflation expectations.
If we’re going to encourage people throwing money around, we should at least do it in some way that encourages expansion of supply in order to keep downward pressure on prices, as opposed to just driving them up and up via compettion over existing stock.
If any banks start doing 50 year mortgages, I hope they call them Trump Loans, and I hope that whatever problems they cause, they cause before Trump dies. I know he won’t give a shit about the homeowners, but I know it’ll drive him mad to hear about the Trump Loan Crises every time he turns on the TV.
A lower payment with a higher rate and longer term means considerably more interest for the bank, especially at the beginning of the loan. I think that’s exactly the type of loan people with bad credit are offered.
On a 30 year, $100,000 loan, at 5%, you’ll pay about $93k in interest over the life of the loan.
On a 50 year loan, however, at the 20 year mark, you’ll already have paid the bank $100,000, just in interest. Enough to cover the entire principal while only reducing the amount you owe by 10k or so.
If you die or default or otherwise stop paying your mortgage after the 20 year mark, the bank has already made their money back. The rest is gravy.
It’s a terrible idea. Home ownership is one of the few joys in life. I’m no expert, but isn’t home ownership one of the best ways to build generational wealth for the not rich people.
I don’t think it’s either a terrible or a great idea in isolation, but I think it would be useless as a solution to high housing prices in the current economy. (To be excessively fair, this is also true of ideas like giving $25k gratis to first-time home buyers, as was proposed by Trump’s opponent last year.)
This would build more generational wealth for many current homeowners by bidding prices up even higher. (Your generational wealth is someone else’s outrageous expense.)
Right, but the higher interest rate is because a risk premium is added, and this is more commonly done for small lines of credit, where borrowers can build history and graduate to better terms. So this would pile even higher rates for mortgage borrowers, who probably wouldn’t manage the added premium of borrower risk on top of the risk of the longer term.
You mentioned several times that banks make more money, which is true, but my point was more about this not being helpful for borrowers who already struggle to get loans.
People can and do pay off mortgages early - but lots don’t. I’m 62 and paid off my house a few years ago even though the original 40 year mortgage should still have a few years to run.Refinanced a couple of times as interest rates dropped. But part of the reason we paid it off early is because it’s a “starter” house. It’s not terribly uncommon here for people to live in a small house for their entire lives and if I had been trading up and taking out loans to pay for expensive private colleges like my peers did, I’d still be working and paying a mortgage like they are.
That’s the thing - one the one hand, it’s not wrong to say that if you can’t afford a little extra towards the mortgage you bought more house than you can afford. On the other hand, many/most people who do have a few extra dollars every month choose to spend it in other ways so most people who take out 50 year mortgages won’t pay them off much sooner.
I’d say the proposal generally stands to help banks earn a good deal more money over time than providing borrowers with significantly lower borrowing rates and/or payments. I do, however, want to acknowledge that this proposal falls somewhere along the lines of actually being ‘sane’. Which, in the scope of things Trump does is refreshing. It’s nice once in while not to have to turn on the news to hear about less savory ideas, such as invading Venezuela with no cassis belli, or violating the posse comitatus act by sending in the National Guard into dark blue cities like Chicago.
What do you consider being “sane” about this? I’ll grant that it looks extremely favorable when compared side-by-side with the silly attempts to annex Greenland, but what about the idea on its own merits.
Same for me. I’m at 3.25%, Compared to a high-interest savings account, and taking taxes into consideration, it is slightly favorable to pay off, but not favorable enough to lock up that much liquidity in my home. I’ll just keep chipping for 5 more years.
That was kinda my point. It’s refreshing to see policies merely rewarding corporate greed as opposed to unhinged lunacy like planning to invade Panama and the like.
That was what I was thinking; AFAIK the mortgage period is set by the lenders, not the government, so they can offer whatever period they choose.
Clearly they don’t perceive that a longer term mortgage than 30 years is going to make them more money than the usual 30 year mortgage.
Why? My guesses are that they already have a problem with defaults and what-not, considering that they require new lenders to carry mortgage insurance for some period, and most prospective homeowners struggle with the down payment more than they do the monthly payment anyway.
I would think a smarter way to go about making home ownership easier would be to figure out some sort of down payment assistance/rules/whatever, instead of just extending the term of the loan out in some sort of (was anyone really surprised?) simplistic thought process that longer term loans are the answer to the home ownership problem.
I mean in concept this is the same sort of thing as a 72 or 84 month car note, except that it’s “good” debt. Except that at a 50 year time frame, you’re more likely to end up with people dying and still owing on their homes and then their heirs having to settle up with the mortgage companies, instead of paying their homes off in their 50s and 60s and passing that home on to their children as generational wealth.
So if the goal is to stimulate lending companies and estate lawyers, then it’ll probably do that just fine. Otherwise, it doesn’t really do much in the long haul for the buyers, and actually reduces the wealth they can pass on to their heirs.
And just to crow a little bit, due to some very fortuitous interest rate drops in the 2012 time frame, we were able to set things up to actually pay our house off in about 18 years- next July is the happy month! It’s such a nice feeling to see four digits on the mortgage balance, and the idea that we’d have 32 years more to go if we’d got one of these hypothetical 50 year notes depresses me.
People pay off mortgages every time they sell their house and move. One difference with a 50 year mortgage is that they will have built up a lot less equity over the X years they lived in the house before moving, whatever X is.
To be fair, it depends on a lot of factors. My mortgage is at 3.25% and my Money Market is yielding 3.6% (was 5% a while back).
So early payoff doesn’t make sense.
This is a big part of what people (not nec here at SDMB) are missing. If you’re in the house for less than 10 years you’ve basically paid nothing but interest.
This isn’t a greed proposal. Many, many people can’t afford a 30 year mortgage. A 50 year mortgage would lower their monthly payment and allow them to have “Home Ownership” which you describe as one of the few joys in life. Just because it isn’t for you or me, doesn’t mean someone not as fortunate as you should be deprived of home ownership.
Just because you finance it over 50 years rather than 30, doesn’t make them having less ownership of their home…yes less equity most likely, but they are still on the deed. Does that make someone that financed their home over 15 years better than you if you financed over 30 years. I’m sure in the post-war (late 1940’s) era when 30 year mortgages were introduced, many people thought that it was ridiculous that people would take that long to pay off a house, when mortgage loans previously were 5-10 years.
This isn’t a government issue, this is a consumer and lending practice issue.
Right, and a lot of times that innumeracy manifests in people forgetting that the monthly savings is worth something, then failing to do the calculation to figure out how much that monthly savings is worth. For example, at 10% per year, $1 saved in the first month becomes $19.67 after 30 years, but they’ll tell you “you’re only saving a dollar!” when they should say “That’s 20 bucks right there!”
Innumeracy prevails.
The other asset, of course, would be cash. The cash you didn’t give to the bank and presumably did something better with.
At 30, how old would you be in 50 years if you didn’t get the mortgage?
Technically true, but not significantly. At 30 year, 6%, you could buy, say, $500,000. If the 50 year were at 6.5%, you could use the same payment to get…$532k. It’s roughly 7% more, depending on the exact interest rate spread. 7% would be equivalent to, like, a year and half of price appreciation anyway.
I assumed the plan was to designate them conforming. The reason it’s not commonly advertised today is because it’s nonconforming.
I’m sorry, what? Mortgage debt is bad? Mortgage debt is one of the greatest sources of leverage available to the middle class. Fools pay off their mortgages. The financially literate carry it as “good debt.” Over 50% of the country has an interest rate below 4%, and they’d be idiots to ever pay that off faster than legally necessary.
And equity doesn’t build slowly. Equity in the house builds slowly. Equity in the 401k builds faster.
This. Exactly this. I’ve done extensive math on this because I’m a nerd, and the rule of thumb would be very simple: If you assume 10% stock appreciation, then you want the 50 year if it’s no higher than 0.625% more than the 30-year. That is, if the spread is 1%, take the 30 year. If the spread is .5%, take the 50 year. If it’s .625, flip a coin or find a crystal ball.
A long while back we had a 5.25% mortgage, and rates dropped into the high 3’s/low 4’s. I built a spreadsheet that let me toggle various interest rates from lenders vs my own return, but I also included the points and fees that often came with refinancing. Invariably, it was either a close call or slightly to the lender’s benefit, so we ended up just paying off early.