50 Year Mortgage Should only be offered to Investors

[Alan Asriants]

After hearing about the proposed 50-year mortgage, I started to think about certain scenarios and who it could actually be beneficial for. I don’t think that a 15-year mortgage could be offered at the same rate as a 30-year mortgage, just like we already see with the difference between a 15- and 30-year loan. And assuming even a half-percent increase for a 50-year term, there is actually a minimal amount of monthly savings a buyer would achieve. I don’t think there is any scenario where a bank would lend out a 50-year loan at a similar rate.

I ran the numbers on a 500k loan—one at 50 years with a 7% rate, and the other at 30 years with a 6.5% rate.

50-Year Mortgage:

Monthly payment: $3,008.44

Principal paid in first 10 years: $15,884.96

Remaining balance after 10 years: $484,115.04

Year when principal exceeds interest in each payment: Year 40.17

Notes: Very slow amortization; almost all payments go to interest for decades.

30-Year Mortgage:

Monthly payment: $3,160.34

Principal paid in first 10 years: $76,119.37

Remaining balance after 10 years: $423,880.63

Year when principal exceeds interest in each payment: Year 19.42

Notes: Much faster payoff compared to the 50-year option.

After 10 years on a 50-year loan, you have only paid off about 3.1% of the loan.

After 10 years on a 30-year loan, you have paid off about 15.2%.

So not only is the savings less than $200 per month—in this case about $150—but there is barely any principal buy-down. For most Americans this is an extremely over-leveraged position.

However, investors typically find themselves in leveraged positions, and $150 per month in additional cash flow could make more sense, especially if the property is treated as an asset that is actually generating income. Extra cash flow can help some get into real estate investing and help others maintain their properties—of course at the cost of minimal equity paydown, which is what truly builds wealth.

That is the difference! Your primary home is not an income-generating asset, and therefore a 50-year loan is not a smart choice for anyone looking to take a solid financial route. In fact, it is very risky and does not build wealth; it only keeps you tied to the payment for much longer. The American dream will be difficult to achieve for those choosing a 50-year loan.