50-Year Mortgage Proposal Explained
Would you pay for your home for 50 years? It’s an idea being floated by the Trump administration as a way to make home ownership more affordable.
The White House is considering backing a proposal that will allow banks to offer 50-year mortgages to home buyers.
The “Complete Game Changer” Claim
Bill Pulte, director of the Federal Housing Finance Agency, said on social media last weekend that a 50-year mortgage would be a “complete game changer for homebuyers.”
I would agree with that, but not in the way he is suggesting. Let’s put some numbers to it.
50-Year vs. 30-Year Mortgage Payment Comparison
The average selling price of a home in the U.S. is about $415,000.
Check out this chart from the Associated Press.
Assuming a 10% down payment, and an average interest rate of 6.17%, the monthly payment would be $2,288 on a 30-year mortgage, and $2,022 on a 50-year mortgage. That’s a savings of just $266 per month.
But, as you see on the chart, because you are paying for it for 20 years longer, the interest difference is astronomical. You would pay $389,000 more.
Long-Term Cost and Lost Equity Growth
Not only would you pay more, but because you pay more interest in the earlier years of the mortgage, it would take you 30 years to accumulate $100,000 in equity in the home, compared to 12-13 years on a 30-year note.
Most people are going to move at some point, and you would not have much equity to roll into a new home. It’s just a bad idea.
Why Homeownership Is Getting Harder in America
There’s no doubt home ownership in America is becoming more difficult today than it has been in nearly the last century.
The average age of a first-time homeowner is now 40 years old, according to a survey by the National Association of Realtors. It was 33 just five years ago.
Mortgage rates are higher now than in 2020, but that’s not the only problem. The average age of a first-time homebuyer in 1981 was 29. The average mortgage rate then was more than 16%. It’s not just about the mortgage rate. But, it could be that the perception of rates is high, and people are waiting for them to go down.
Home Prices vs. Income: 25-Year Affordability Comparison
It’s not even all about affordability. If you take the average selling price of a home today of $415,000, and compare that to the median household income in America of about $83,000, you would find household income is about 20% of the home price.
Twenty-five years ago, the average home price was $201,000, and the median income was $42,000. That’s still about 20%.
The Real Path to Affordable Homeownership
Whatever the reasons for home ownership being more elusive, swamping yourself with even more debt with a 50-year mortgage is not the solution.
Saving for a sizable down payment, settling for the price of home you can actually afford, and paying it off in a more timely manner is a better path to home ownership, and to true financial independence.
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