Ever since President Trump floated the idea of offering mortgages for 50 years, there’s been a buzz wondering if that could be a good option to help make home ownership more affordable. It’s happened for automobile financing over the years. The 3 year car loan went to 5 years and then 7 years. Why not do the same for home loans? Is a 50 year mortgage really a good option?
Pros for a 50 year mortgage
The most obvious reason to extend the length of the home loan is for affordability. Homes are expensive. According to the National Association of Realtors, the average age for a first time home buyer is now 40 years old. In 1991, first time homebuyers were just 28 years old on average.
Home ownership is the biggest wealth building tool for the middle class. Delaying that first purchase by 12 years is certainly going to impact the amount of wealth that can be built. It’s like compounded interest. 12 years is an eternity in wealth building years. Assuming the value of the home has not changed, it can mean the difference of building $83,000 in equity on a $400,000 loan to $0 in equity when renting. Even a 50 year mortgage will build $22,000 in equity in the first 12 years. Not as good as $83,000 in a 30 year mortgage but better than nothing.
Cons for a 50 year mortgage
15 year mortgages are currently available. Most people don’t use them even though more of each payment goes toward principle. They don’t use them even though they pay less in interest over the life of the loan. The average person tends to look primarily at payment amounts when making financial decisions. The immediate impact on life is much more important than the benefits happening years in the future. It’s the same reason so many peoples’ retirement is underfunded. More value is placed on the here and now. As a result, if the 50 year mortgage becomes readily available for home loans, it will soon be the mortgage most often used as it will have the lowest monthly payment for homeowners.
This tool needs to be used responsibility. Just like other mortgage tools. There is a time and place for an adjustable rate mortgage. It’s not the right product for every person in every situation. The same would be true for a 50 year mortgage. Perhaps it’s the right tool to get first time homebuyers into a home sooner but may not be the the right tool for the move up buyer. That would need to be determined.
Bringing in the 50 year mortgage would degrade the benefits of home ownership. Home ownership is not the only way to get ahead in the world but it certainly plays a large part. Does watering it down do more harm than good? The illusion of being the land of opportunity would still be there but it may no longer be the reality.
A possible solution
Maybe the way to introduce a 50 year mortgage would be to offer it with limited uses. It could have a niche like FHA loans do. Structuring the product to be beneficial to first time home buyers and less beneficial to other types of buyers. A structure that controls the use; utilizing the benefits while limiting the downside.
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