Housing is always an issue for some of the population. But for the last few decades, it’s become an issue for a growing number. It’s no longer just the lowest income families that struggle to afford homeownership. Many in the middle-class has joined the unfortunate group who see the American Dream as a crusty, brown tinted polaroid, wishing for the days of old. Going to college and working hard is no longer a guaranteed formula to having the ability to own a home. So what needs to happen to fix this problem?
Trump’s “Solution”?
Recently, Bill Pulte, Federal Housing Finance Agency Director, signaled the Trump administration was working on a solution to the housing crisis. “Thanks to President Trump, we are indeed working on the 50 year mortgage - a complete game changer”. At first glance, a sound solution. A longer term means a smaller monthly payment that makes the home more “affordable”. But only if you look at it on a monthly basis. In it’s totality, it robs you of your chance to build wealth
Brief History of Mortgages
Under the Roosevelt administration the Federal Housing Administration (FHA) was formed in 1934 under the National Housing Act. The FHA standardized 30 year mortgages with the goal of stabilizing the housing market and increase homeownership during the Great Depression. Before this, typical mortgages were 3 to 5 years where the down payment was 40-60% of the mortgage. Buyers would owe a balloon payment at the end of the term and would often be forced to refinance. Homebuyers would refinance repeatedly as they could hardly ever make the balloon payment at the end of such a short term. The 30-year mortgage was a true game changer for America.
How the 50-Year Mortgage Works
Only the financially illiterate would accept a 50-year mortgage. Looking at a $500k mortgage with 6.5% interest, the 50 yr doesn’t doesn’t make much sense. 1
Sure, you save approximately $342 per month on the mortgage payment. But the long-term impact of interest will kill your chances of building wealth. With the 50-yr, so much more of your payment is going to interest and not the principal on your loan. Saving $342 per month equals $123,120 over the life of the loan. But you pay an extra $533,428 in interest in this example.
A 30-year mortgage is the clear winner over the 50-year assuming the same interest rate. However, the interest is likely to be higher for the longer-termed loan. The longer the loan term, they higher risk the bank is taking. Banks will increase the interest to account for the added risk. You’re likely paying much more in interest with the 50-year mortgage than what this scenario shows.
The time of people buying a home and staying in it for 50 years is over. Our grandparents may have, but we won’t. The average length a home buyer stays in their main residence is 11.8 years. The average tenure has increased recently due to higher interest rates and inflation. It would be less than 10 years if interest and inflation were lower.
Longer term → More interest paid to banks → Longer for you to build equity in the home
Using the scenario above, if you were to buy a home with a 50-year mortgage today, you’d have about $475,000 left to pay on it at the end of 2037. That’s 12 years with only $25k of your principal paid off! The same loan with a 30-year mortgage leaves you with $399,000 at the end of 12 years. That’s $49,000 more in mortgage payments over that 12 year period but with $76k more in equity!
If you are considering a 50-year mortgage, don’t. Buy a smaller home or consider the fact that you may not be ready to be a homebuyer, and that’s ok. Continue to build and get to that point but don’t sabotage your future financial wealth JUST to say “I own a home.”