The Misunderstood 50-Year Mortgage
Yes, you'll pay more total interest. No, that's not necessarily a problem
Source: mortgagecalculator.org
Educated people are confidently stating things about mortgages that are simply wrong. It’s particularly obvious, and annoying, in the recent discussions of President Trump’s advocacy of a 50-year mortgage.
I’m not here to defend Trump’s proposal. I don’t think it would meaningfully make housing cheaper. What we really need is more housing construction, not lower monthly payments, which might just cause buyers to bid up prices on the existing housing stock.
But I do want to critique the critics who dwell on the fact that the interest paid over the life of a 50-year mortgage would be higher than the interest paid over the life of a 30-year mortgage. (Here are a few articles harping on that point.)
It’s both true and irrelevant. It ignores the time value of money. A dollar you manage to save today is worth more than a dollar you manage to save 20 or 30 or 50 years from now. If you can save a dollar on your mortgage payment today by getting a longer-term mortgage and you invest it safely at 4.7 percent (which is what 30-year Treasuries are yielding now), after 50 years your one dollar will turn into nearly $10, ignoring taxes.
You could use some of that $10 to pay some of that interest. True, by year 50 the monthly payment is almost entirely principal, not interest, but you get the point: All dollars are not created equal. Future ones are worth less than current ones. So don’t be afraid if the interest payments on your house are going to exceed the house’s current value; a lot of that interest will be paid far in the future, when it won’t seem like so much anymore.
What we should be using is a mortgage calculator that compares mortgage loans in terms of their present value — that is, converts their entire future payment streams into today’s dollars. If you know of one on the internet, please write and let me know.
While we’re at it, I’ll say another good thing about a 50-year mortgage: By making your monthly payment smaller, it reduces the risk that you won’t be able to pay it and will lose your home. That’s worth a lot.
Critics point out that your equity in your home rises more gradually when you have a 50-year mortgage. True, but you always have the option to make extra principal payments and build equity faster. That makes it a good option for people who are responsible savers and don’t need to be forced into building equity by the terms of a 15- or 30-year mortgage.
I also don’t buy the criticism that 50 years is too long for a mortgage on the grounds the median age of first-time homebuyers is 40, a record. First, most people pay off mortgages long before they come due, and that would be even more the case for 50-year mortgages. Second, if they die with a mortgage remaining on their home, the remaining debt will be paid out of the estate, which usually works out fine.
To me the biggest downside of a 50-year mortgage is that the interest rate would be higher, just as the rate on a 30-year loan is higher than one on a 15-year loan. (The extra interest compensates lenders for the risk of nonpayment or prepayment.) That would wipe out much of the advantage of spreading the principal payments out over more years.
In the end, I don’t think the 50-year mortgage is a huge deal either way. I just want to dislodge the entrenched notion that you should judge a mortgage by the size of its lifetime interest payments.
I do not know what world you live in, but it is clearly a privileged one. I do not know one single person who has ever paid off their mortgage early unless they sold the house, bought a new one and got another 30 year mortgage on the new house. The average American does not have extra money to apply towards principal because they are struggling just to take care of basic life necessities. The mortgage payment is most likely going to go up every single year because of rising insurance costs and tax increases. They are not going to have “extra” money for investing by taking out a predatory 50 year mortgage. They are going to have a bit more money for those basic life necessities which, by the way, are also rising in cost every single year. The 50 year mortgage is not going to help the average American. It is only going to help those who don’t need help - the banks and mortgage holders.
I'm wondering increasingly how much NYT columns are massaged before they're let out, because I really don't remember anything as far off the mark as what I've been seeing lately here.
The reason there's even discussion about a 50-year mortgage is that [excuse me, I'm shouting for the ear-trumpet] PEOPLE CAN'T AFFORD THE MONTHLY ON THE 30-YEARS BECAUSE THE PRICE OF HOUSING IS TOO DAMN HIGH NEXT TO INCOME. If they can't afford that, Peter, the few hundred they "save" is *money they need to live on*. Nondiscretionary. They are not investing that money; they're spending it on cars. Clothes. Heating. You know, living.
People also pay off mortgages because they move, not because they live in a place for even 30 years. The difference between a 30-year and a 50-year, though, is that there's greater chance of their having built some appreciable equity before they move, so that they're not just paying rent to the bank all their lives.
I understand the long-loan appeal. You wouldn't know how to live on my income, but I've got a 20-year, 2.75% loan I took out for home energy efficiency and generation: rooftop solar, more efficient replacements for my end-of-life water heater and furnace. The very low monthly made efficiency and GHG-emission reduction affordable. It pencils out because the interest rate's so low and the drop in my purchased-energy costs is appreciable (my util bill is about $40/mo on average now in a cold continental climate, around a quarter what it was before, inflation-adjusted), and I'd have had needed a loan for at least part of the new equipment anyway, so a long low-interest loan was the best deal going. I am also likely to live in this house for the entire term of the loan.
I really think that before you sit down to write your next column, you should write these things on post-its and put them on your screen:
In America,
- Half of Gen X has nothing saved for retirement. The oldest Xers are nearly 60.
- Gen Xers are already moving in with their children because they can't afford housing. Others are considering buying vans to live in as retirement housing.
- Fewer than half of all adults have enough saved to withstand three months of unemployment.
- Only half of all women have an emergency fund.
- Gen Xers have a median non-mortgage debt of around $26K, around 40% of their median annual income. Millennials have median non-mortgage debt of around $25K on lower salaries, so their load is closer to half their annual income. Most do not make enough money vs COL to chip away appreciably at that debt.
- Only about a quarter of adults are college graduates, rising to closer to half among the youngest adults.
- Only about 15% of adults have graduate degrees of any kind.
- Nearly as many, around 12%, are on SNAP, meaning they are destitute.
- There is persistent hiring, promotion, and wage discrimination against anyone who is not a white man.
When you think of America, your picture should be this: think of the Connor household in Roseanne, but then consider that they're quite well-off because despite the fact that Dan and Roseanne are only high-school graduates, they own a house, they are a two-income household, Dan owns his own trades business and no national franchise has come around to undercut him yet, none of the kids has a disability, and their non-mortgage debt levels are relatively low. In their world, college tuition is also low enough and federal fin aid high enough that it's possible the kids could go to college if they live at home. Jackie's a unionized civil servant and will have a pension. Their flyover town is suffering, but still kicking. Next to today, this is a very solid picture.