50 Year Mortgage: Terrible For Homeowners, Great For Lenders

[Michael Carbonare]

https://wolfstreet.com/.../a-50-year-mortgage-does.../

𝐓𝐡𝐞 𝟓𝟎-𝐘𝐞𝐚𝐫 𝐌𝐨𝐫𝐭𝐠𝐚𝐠𝐞 𝐈𝐬𝐧'𝐭 𝐚 𝐒𝐨𝐥𝐮𝐭𝐢𝐨𝐧. 𝐈𝐭’𝐬 𝐚 𝐓𝐫𝐚𝐩.

I’m seeing a lot of chatter about proposed 50-year mortgages.  On the surface it looks like “affordability relief”.  Lower monthly payments, longer payoff horizon.  But the hard truth is it’s a terrible deal for the homeowner and an outstanding deal for the banks and investors.

On a $500K mortgage at today’s rates, moving from a 30-year to a 50-year only shaves off about $90/month in payment.  But the lifetime cost?  On a 50-year term you’d pay nearly $1 million in interest alone, compared to about $600K over 30 years.  The amortization curve is brutal.  After 15 years you could still owe $470K on a 50-year loan compared to $359K on a 30-year.

What this really is:  a loophole for lenders/investors to lock you into decades of high interest.  A thin veneer of “lower payments” that doesn’t address the core problem: sky-high purchase prices and weak equity build-up.  This plan was cooked up to save the housing industry, not for the homeowner.

I work with new investors in creative investing strategies.  I see this as a red flag, something to avoid.  If you’re buying with a 50-year mortgage expecting to “ride it out,” you will end up building equity at a snail’s pace and being more vulnerable if home values dip or life moves you.  Paying far, far more over the term of the loan.

Here’s what does help with affordability and investment mindset:  buying below market value or finding favorable terms through creative strategies.  Understanding that the quality of the deal, (price + terms), matters more than just a lower payment.  Building equity and then using that to create flexibility and financial options, (moves, flips, lease-options), rather than locking yourself in for 50 years.

If you’re ok with paying more interest in exchange for a slightly lower monthly payment, fine.  But let’s call it what it is.  Don’t let the marketing gloss fool you.  Would you take a 50-year mortgage if you were buying a rental property or your first personal home, knowing the numbers above?  What factors would make you say yes or no?

[John Morgan]

The point of the 50 year mortgage is to help qualify or get some first time buyers in the game with a lower mortgage payment. It's funny how this triggers some people. Saving $200-300/month is a lot of money for some people. Most will obviously plan on refinancing out of it or sell within the first 5-7 years. This is what we did when we first bought with an ARM. People told us it was dumb to buy and get an ARM, but it saved us around $150/month and helped us qualify. We knew that starter home wouldn't be our final home and we assumed our incomes would go up over time with the careers we had. This got us out of renting years sooner and paying someone else's mortgage off with nothing to show. We moved 5 years later and could barely afford our new and final home with a 30 year mortgage. People at the time told us it wasn't smart to get a 30 year mortgage due to all the interest the bank would make on us. We couldn't afford or qualify for a home with a 15 year mortgage so a 30 year was our only hope. If they had a 50 year mortgage with a payment $250/month cheaper, we would have jumped on it. Our plan was to refi once our incomes went up and get a 15 year mortgage which we did.

If we would have listened to people that said don't ever get an ARM or 30/40 year mortgage, we would have been renting for an extra 10 years with nothing to show. Instead, we bought a house and gained quite a bit of equity. Then sold that house and used 50-60k of that equity to use as a down payment for our final home. And used the rest of that equity to pay off our car loans so we were debt free other than a manageable mortgage. Not everyone wants to rent forever and have nothing to show for it other than helping the landlords pay off their mortgages. And if a 50 year mortgage with a lower payment helps them get in the game years sooner, then props to them. Homes historically go up in value 4%/year. That's 16k/year for the average home. Or 90k+ in equity over the first 5 years. That's a lot for some people and most will sell or refi within 5-7 years. So I see this as a great option for first time home buyers like us that couldn't afford to buy with a traditional 30 year fixed mortgage.