Breaking Down the Debate on 50-Year Mortgages

So, the federal government is going to bring 50-year mortgages back? Yes, the idea has been tried before. Some lenders marketed 50-year mortgages back in the lead-up to the 2008 mortgage crisis — although those loans weren’t government-backed.

We can’t tell how the federal government would try to make them work this time, but there’s a lot we do know about mortgages, and paying them. So let’s dive into this debate.

Desperate Idea Suggests Profound Distress in U.S. Market

When anyone starts pushing 50-year mortgages because younger buyers are in such a bind, you know the housing market’s in a pickle. Just how bad is it? Well, on November 4 of this year, Realtor.com® announced that the median age for a first-time U.S. homebuyer is 40 years. Let that sink in.

Now, pair that with the picture of a 40-year-old, first-time home buyer at closing day, starting a 50-year mortgage.

Why are people waiting so long before deciding to acquire their first deeds? Well, home prices are just too high. This is the case in many popular areas where people want to live and work: California, New York, the Mid-Atlantic states…

Supposedly, a 50-year term would help hopeful buyers nationwide. Supporters of the idea see it as making payments easier for a home buyer, in contrast to the usual 30-year loan.

But would it really?

A spokesperson for the Mortgage Bankers Association told reporters at The Hill to expect any affordability benefit to be offset by the risk factor that builds up for borrowers saddled with long-term debt.

Generally, a home buyer with a 50-year mortgage should expect to pay twice the interest that borrowers with 30-year mortgages pay over the course of their loans.  

Moreover, a fifty-year span would come with a higher rate than a 30-year mortgage — just as a 30-year loan has a higher interest rate than a 15-year mortgage. It’s been proven that the default risk increases as mortgage terms lengthen, and the lending industry demands higher interest to cover that risk.  

How much higher would the 50-year rate be? Housing experts say at least 1% higher than the 30-year rate. That’s a hefty increase for a deed holder’s monthly payment — not a reduction.

Even if the government could figure out a way to lower monthly costs, this would likely lure hopeful deed holders to buy pricier homes than they otherwise would have. Swelling demand would push prices upward — canceling out possible benefits for the people currently hoping to qualify for the proposed 50-year loans.

Sabotaging a Deed Holder’s Equity-Building Efforts

Granted, many people won’t stay in a mortgage all 50 years. Most people sell or refinance within 7 to 10 years. For them, a 50-year mortgage makes zero sense, as their high remaining balances would put them at a disadvantage when they go to sell or refinance.

As for those who buy a home for the long term, they’d be waiting an awfully long time to build equity. The Mortgage Bankers Association has pointed to this, telling reporters at The Hill about the slower equity growth that would happen with a 50-year loan.

There’s yet another reason we’d be paying off the debt for a painfully long time, and that’s the mortgage insurance a lender would tack on.

Until we can build up equity to the point where we own 20% of our homes, we pay private mortgage insurance (PMI). On an FHA loan, most borrowers have to pay mortgage insurance for the duration of the mortgage term, or until we can refinance into a mortgage that won’t require it.

By stretching a debt term from 30 to 50 years, we more than double the time it takes to clear off that pesky, painful mortgage insurance surcharge.

And speaking of being in debt for a painfully long time, it’s worth paying attention to Bill Collins, who directs title insurance for the Frontier Abstract & Research firm. Collins notes that a 50-year mortgage presents a significant “tail-end” problem:

We’d be looking at a significant rise in mortgage delinquencies and foreclosures and [a] large increase in financial distress among elderly homeowners.

That kind of scenario might be OK for some lenders. But for the people this kind of mortgage is supposed to help? It’s cringeworthy. Collins continues:

The 50-year mortgage is really just a prescription to keep homeowners permanently in debt.

The longer it takes people to pay down their mortgages, the more likely they are, statistically, to get into situations where markets weaken and deed holders go underwater — owing more than their homes are worth on the market. That situation makes selling or refinancing impossible, and default more likely. 

Unless you’re putting at least 20% down, you’ll be asked to pay private mortgage insurance every month. Need to know more? Consult our guide to private mortgage insurance.

Will the 50-Year Mortgage Materialize?

William Pulte, the developer who became director of the Federal Housing Finance Agency, has said:  “Thanks to President Trump, we are indeed working on The 50 year Mortgage – a complete game changer.”

But will anyone actually want it if it does come into being? Once this idea gets studied more, its supporters will have to observe that a 40-year mortgage already exists, but there’s very little demand from the public for such a long term. Fannie Mae and Freddie Mac will back 30-year loans, not longer. Would the Federal Housing Finance Agency try to change that rule?

That question brings us to the next reason why this idea probably won’t fly. It would take a lot of wrangling with lawmakers. Congress would have to vote on the proposal. A 50-year mortgage is a non-QM loan — not a qualified mortgage. And the Dodd-Frank Act of 2010 put cautionary guardrails up to obstruct ideas like this. Risky, nonstandard loans should be hard to create and issue.

A 30-year mortgage seems to hit the sweet spot. It lets applicants agree to pay for their home over three decades, which is the normal course of a career. It distributes the debt over 360 monthly payments. A 50-year mortgage would extend the bank’s control over a deed holder for two additional decades, adding up to a staggering 600 payments.

Perhaps this headline over at TheStreet puts the point best:

The Fifty-Year Mortgage Makes No Sense to Anyone.