|
Getting your Trinity Audio player ready...
|
Last week, President Donald Trump floated the idea of 50-year mortgages in a post on Truth Social.
While the goal of the 50-year mortgage is to make homeownership more affordable since the longer term of the mortgage results in a reduced monthly payment, the proposal was widely panned by economic analysts. This publication asked local housing experts whether a 50-year mortgage could work in an area known for some of the most expensive real estate in the country.
Alan Eidinger, a real estate lending professional at the mortgage broker Silicon Valley Mortgage expressed deep skepticism about the proposal.
“I think it’s lunacy,” Eidinger said. “It’s an elegant solution to a problem we don’t have in the marketplace.”
Eidinger said that the monthly payment savings of a 50-year mortgage would be negligible compared to a 30-year mortgage, noting that the likely-higher interest rate on a 50-year loan erodes much of the expected affordability advantage.
While Tammie Peters, president of the Silicon Valley Association of Realtors, was also hesitant about a 50-year mortgage, she said it could be beneficial to a very specific buyer. The longer mortgage, Peters said, could serve as an affordability bridge for families expecting higher income from a new job or reduced costs, such as a child graduating from college. After the income change, the family could refinance into a better mortgage. In another case, a 50-year mortgage could be strategic if a home appreciates in value notably, allowing the homeowner to sell the house at a gain even with little equity.
“[In] Silicon Valley, I can see it working a little better than maybe some other areas, just because we do see significant appreciation,” Peters said.
Peters gave an example of a $1.5 million home with a homebuyer paying a 20% down payment, meaning they would obtain a $1.2 million loan. A 30-year mortgage at a 6.5% interest rate would cost around $7,600 per month, while a 50-year mortgage at a 6.75% interest rate would cost around $6,964. The 50-year option, therefore, would be $600 lower per month, or $7,200 per year.
A mortgage operates as a forced savings plan, compelling homeowners to pay down the principal on the loan amount and building equity over time. But in the 50-year mortgage, Eidinger said, homeowners build equity far more slowly because they must pay much more interest over the life of the mortgage. In the case of the $1.2 million loan, homeowners would pay nearly $3 million in interest alone over the course of the 50-year mortgage, compared to only $1.5 million for a 30-year mortgage.
“The benefit of the forced savings plan doesn’t work in your favor,” Eidinger said.
Further, many homeowners refinance or move before the end of their mortgages. Redfin estimated that the typical U.S. homeowner spends 12 years in their home. If a homeowner moves after five or ten years, they’ll walk away with much less than they would under a 30-year loan because so much of the monthly mortgage payment is being paid toward the interest payment. In the $1.2 million loan example, Peters calculated that a homeowner would have paid down $76,000 of principal after five years on a 30-year mortgage, compared with about $15,000 on a 50-year mortgage.
“They’re not going to have much equity,” Peters said. “So at that point, it almost seems like renting makes more sense.”
