Back in Washington, D.C., the Department of Dumb Ideas has been busy, even during the (now ended) federal government shutdown.
Their latest: Creating the 50-year mortgage.
This is supposed to be about "affordability."
Sure, spreading payments out over a longer period of time means making individual monthly payments somewhat lower.
We get that. But it's not without some rather glaringly obvious downsides.
How obvious?
The instant reaction against the touted "complete game changer" of the 50-year mortgage broke out online as a rare instance of something that fully unites the right and left sides of the political spectrum.
Everyone hates it.
One of our college-student kids rolled their eyes so aggressively after seeing the concept on Instagram, we thought their eyeballs would pop right out of their sockets.
The commentary out in the world has been unsparing. Some words and phrases we've seen:
"Madness."
"Criminal."
"That means a lifetime of debt slavery."
"Kids will inherit mortgages, not homes."
People seem to grasp that the concept is awful for consumers, and a windfall for lenders.
For the first time ever, MB Confidential will now quote one Christopher Rufo, from his post on X dot com:
The idea behind the 15- and 30-year mortgage is that you eventually own the home you live in, whereas the 50-year mortgage abandons this pretense altogether and fully embraces the idea of housing as a speculative asset. Not good, unless you’re a bank.”
It's good to see the negative reaction, as it suggests that people are awake and paying attention. But that's no guarantee that 50-year mortgages won't be pushed out there anyway.
The nation's chief executive seems unbothered by the reaction, saying in a TV interview:
It’s not even a big deal … all it means is you pay less per month, you pay it over a longer period of time... It might help a little bit.”
Game changer? No big deal?
We'll dive deeper here into the tradeoffs and implications that a Manhattan Beach home buyer might face in a world where "jumbo" 50-year mortgages are available.
We've got plenty of graphs and charts!
Buyers Pay More – Lots More, Over Time
The first problem is that the longer the loan, the more time interest is accruing, which all needs to be paid back.
You might think, hmmm, 30 years is a long time, and 30-year loans don't seem to bother anyone. What's another 20 years?
It's freaking expensive, that's what it is.
We've run some numbers based on a 20%-down purchase on a home priced at the current median price ($3.350M) for Manhattan Beach.
Keep in mind, we build in an assumption that the 50-year loan will be a pricier product. (More below.)
Compared to a 30-year fixed-rate loan, our hypothetical buyer paying on the 50-year loan through its maturity will pay more than double the amount of interest on the $3.350M purchase, $6.505M versus $3.104M.
That's funny. 50 years is not double 30 years, but that is more than double the interest...
The buyer eventually pays a total of almost $9.2M for a $3.3M house.
The 30-year buyer also pays a ton for their $3.3M house: about $5.8M. But that's something everyone seems to accept by now.
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Nerdy notes: Our illustration here uses a base rate of 6.0% for the 30-year fixed-rate loan, which is very close to the current, prevailing rate. We assume that the 50-year rate would be significantly higher, at least a half to three-quarters of a point. We went with 10% higher (6.60%) versus 6.00%. Similarly, for our comparison against a 15-year fixed-rate loan, we assumed a that a 10% lower rate (5.40%) would be offered. All of these are meant to be very real-world figures; in fact, some of these rates are offered now. We used this online calculator to generate amortization tables and, later, comprehensive monthly payments based on current property tax rates and a modest dollar figure for insurance.
But the Payments Are Lower, Right?
The whole point of the 50-year is to make it less costly – on a monthly basis – to acquire a property.
How much of a difference does it make?
For our example purchase here, $3.350M with a loan of 80% LTV, there is not a great difference between the full payments (PITI) on a 30-year versus a 50-year.
You see the payment drop by just $758, from $19,397/mo. to $18,639/mo.
It's a drop, but only 3.9%.
If you're so price-sensitive on a Manhattan Beach home purchase that you need to consider the 50-year loan option... $750 a month!!! ... maybe you should not be buying that Manhattan Beach home?
(This observation would apply to any price point.)
There are two reasons why the hoped-for "bargain" just isn't there.
First, it's the higher rate due on the longer note (+0.6%).
But mainly, it is all that extra interest that's going to accrue over an extra 20 years, and has to be factored into the payments.
600 monthly payments.
If the Laws of Economics were repealed, and the 50-year fixed rate were offered at the same rate as a 30-year fixed, then, you'd see something of a real difference: A gap of $1,960/mo. between the 30-year and 50-year options. That's 10%. That could become a more attractive option for some.
You can see how the folks pushing the 50-year are going to be tempted to play with the rates, maybe keep them "artificially low," because otherwise the product doesn't make much sense for the consumer.
The Problem of Slower Equity Growth
Most people seem to understand that paying over a longer term means you're paying much more interest.
You're also paying that interest mostly toward the front end of the loan. With typical amortization, you only start making larger principal payments as the loan ages.
While you pay less principal, you gain less equity in the property. (Besides appreciation.) Here are some dramatic illustrations.
First we took a look at how payments are divided between principal and interest at the dawn of Year 10 of a loan.
Not surprisingly, that 15-year loan, now 2/3rds to maturity, is up to a whopping 72% principal on each payment.
The 30-year loan is progressing, with 29% principal, but still 71% interest on each payment.
The 50-year loan lags horribly, with just 7% going to principal, and 93% to interest. By the start of Year 15, this proportion grows to only 9%.
Two more quick charts:
As we follow these two loan tracks into their second and third decades, the differences become really stark.
The 30-year loan is majority principal by Year 20, while the 50-year has reached only 13%.
Come to Year 30, and the 30-year loan, almost wrapped up, has a payment that's almost all principal (94%).
But the 50-year is still at only 25%!
Astonishingly, the 50-year loan only turns to 50/50 for principal/interest a full 80% of the way through, on payment 475 out of 600, during the loan's 40th year. How many of the original loan signatories are even around then?
It's almost as grim when you look at where the money from the payments has gone to by years 10 and 20.
Both of these charts should be blinking red lights with bells ringing and those honk! honk! honk! ... ahooga! sounds blaring.
For the first 10 years of your 50-year loan, you pay down only 3% of the principal.
After 20 years, only 8% of your money went to the principal.
Let's say you're a smarty-pants who chose a 50-year loan strategically over a 30-year mainly to minimize your payments, and plan to sell or re-fi within about 10 years. The tradeoff is that you've forfeited about 10% in equity that you could have bought. Instead, it was more like renting the deed for a decade. You've only paid down 3%. Any equity is almost all going to be from market appreciation.
After 20 years of payments, a buyer/homeowner with a 50-year is still relying almost entirely on appreciation, having "bought" only 8% equity, far behind the 37% paid toward principal/equity on a 30-year.
Once again, the 30-year loan hardly comes off smelling like a rose here, but society seems to have accepted that you can pay for 20 years and have seen almost 2/3rds of your money go to interest.
Prices Get Inflated by Cheaper Mortgage Options
Our first, instinctual thought upon hearing about the 50-year mortgage concept was not about debt slavery, but: "How long before that gets priced in?"
Which is to say, if people were widely taking on new loan options with lower monthly payments, there might be a short-term gain in "affordability" for the first group of buyers.
But surely, soon, prices would respond.
Prices would either stop declining, or start increasing, to match up with the newfound buying power of certain market participants. For an extreme example, consider this:
When mortgage rates sank to near 2-3%, Manhattan Beach home prices went to the moon and beyond. We all saw it right here.
Of course, it's arguable how much extra "buying power" a properly priced 50-year mortgage is going to provide anyone. As noted above, it could be a 4%-10% decrease in monthly costs.
Rate fluctuations could be more impactful than this proposed product. (Sorry, but we do not think significantly lower mortgage rates are coming soon.)
Even if people only consider using the 50-year as a temporary, lower-cost option, there are still lots of reasons not to.
Is the 30-Year Mortgage a Bad Deal?
Virtually all of the criticisms that can be levied against the 50-year mortgage can be levied against the 30-year mortgage as well.
Does that mean the 50-year is not so novel, after all? Or that the 30-year is a stinker, too?
These are good questions.
For starters: Did you know that no other nation on Earth relies on 30-year fixed mortgages for houses?
This uniquely American financial innovation came out of the New Deal.
Government guarantees, long loan terms and fixed interest rates are just about as unique to the USA as our failure to adopt the metric system.
When you look at it in detail, there's little doubt that this method of financing is what detaches home prices from income levels. Ask anyone under 40 what that looks like, or feels like. As bumpy as housing markets may be around the world, they're not usually as overpriced as all of the USA.
We can still recall the shock we felt once, upon hearing a nerdy economist at a California Association of Realtors-sponsored event who pronounced the 30-year fixed-rate mortgage as the bane of the housing market in the United States.
Are you even allowed to say that in front of Realtors?
Government guarantees, long loan terms and fixed interest rates are just about as unique to the USA as our failure to adopt the metric system."
The 50-Year Would Make It All Worse
There's not much to do about the 30-year fixed now. Prices are where they are. People need that leverage.
If the 30-year fixed disappeared, home prices could drop by a quarter, maybe half. Not gonna happen.
But should we magnify the problem by creating a new product that makes all of the problems of the 30-year much, much worse? And the lenders that much richer? And true homeownership that much more of a distant dream?
Who is helped?
The reason this 50-year proposal hit with such a thud was not because the masses saw a lot of graphs and charts. It's because people are keenly attuned to whether they're being screwed. And this proposal would do that. Again.
We've seen these sorts of financial products before, in efforts to prop up markets. Subprime loans, teaser rates, balloon payments, short-term interest-only locks, and the whole lot – all meant to encourage more people to take on more debt by limiting the near-term costs of holding that debt.
When you see the government, or the financial system, inventing new debt products in an effort to address affordability concerns, that's a warning sign.
Anyone pushing for the 50-year mortgage is worried about the economy, the direction of the housing market and/or the profitability of lenders.
They're not so worried about the actual people in the housing market.
