Think About The 50-Year Mortgage–as a Borrower

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There has been a great deal of discussion in the last few weeks relating to changing the term of residential mortgages.  That is, most mortgages on the principal residence undertaken in the last many years have involved an amortization period of 15 or 30 years.

Yes, there are variables from this position.  There are also differences as to VA, FHA, and conventional loans.  However, for the most part, most loans on the primary residence in the last many years have been structured to allow for the payoff over a 30-year period.  

Ignoring the myriad hybrid types of loans, such as balloon loans, blanket loans, package loans, reverse mortgage loans, variable rate loans, etc., the basic 30-year amortized loan has been the generic model applied in most instances when financing the purchase of the principal residence in the last decade.

Now, it appears that President Trump, knowing the difficulty for many folks, especially young buyers, to acquire their first home, the Dream Starter Home, has proposed the use of a 50-year mortgage.

Why the longer-term loan?  The answer is quite apparent: The longer the term of the amortization of the mortgage debt, the lower the monthly payment, ceteris paribus. The need to provide for a lower payment for the young buyer is apparent based on recent loan statistics.  The first home for most individuals buying a home today involves a purchaser or purchasers that are 40 years old.

How so?  Why so?

Because the financial burdens of buying a home make it very difficult for a first-time buyer to come up with a downpayment, be in a position to make the monthly payments on the loan (principal and interest) and other payments needed to support the home (utilities, taxes, insurance, maintenance, capital improvements, etc.), and generate the amount of income needed to qualify for a loan, among other issues.  These economic issues have prevented many potential homebuyers from seeking and qualifying for the loan needed to purchase the house.

True, one might say, they should not be buying a home if they cannot meet the above requirements.  They should not strain to reach for the home purchase if such stretch places the new buyer / borrower in a position of likely defaulting on the new home loan.  

OK, this might be an agreed position by many folks examining this position of the new buyer.  However, maybe if the monthly payment was reduced by a few hundred dollars a month by stretching the payback period to 50 years and not using a 30-year payback, it might enable the borrower to reasonably meet the requirements to acquire the first home.  This is the premise of the suggested 50-year loan.

Good or bad?

For the borrower who does not place himself/herself in a position of too great of a financial exposure, this loan may be very helpful to reach the American Dream of home ownership.  

This new position might help generate more sales of homes, which in turn can be of benefit to many people.  Consider the position of lenders, home builders, brokers, bankers and other lending institutions, those involved in the real estate market such as appraisers, title companies, attorneys, other brokers, and many others in the society that gain when houses are sold, and new buyers come into the picture as the first-time home buyer.  

Clearly, we do not want to see defaults by buyers not properly financially qualified to own the home.  But if qualified, the buyer gains the desired home; the seller sells the home and considers other options for living quarters, and many others can benefit from the movement/sale of homes.

If one argues that the 50-year loan creates a huge burden on the buyer, such position is without merit.  How so?

Because most loans are paid off in 7 to 12 years, based on the most recent studies.  That is, people buy a home, possibly thinking they will stay in the home for 20 or more years.  Yet, things happen.  People get married and need to move. Homeowners die and the house is sold. Divorces occur and homes are sold and loans are paid off. The family grows with new children entering the world.  People change jobs and locations for many reasons.  Thus, the 50-year loan will be paid off early, just as 30-year loans are paid off sooner than the initial structure of the term of the loan.  Interestingly, there are normally no prepayment costs or penalties to pay off the loan before the due date.

When Babylon Bee facetiously suggested that if you have a 50-year loan you will need your grandchildren to sign with you, such position was, as noted, a facetious statement.  The borrower is not locked in a 50-year loan of servitude, contrary to some articles that have suggested this lock-in.

Now, we will see if the suggested 50-year term comes about.  (Yes, we will also see if the interest rate on the 50-year loan is increased relative to a 30-year loan; such increase might reduce the desire for the longer-term loan.)

Of course, there are other hurdles for the first time homebuyer.  These include the increased price for the homes on the market, the interest rate that might be a bit high, the downpayment, and other issues.  However, if a young person—or any person—desires to buy a home and not stay in a rental setting, the 50-year loan may be one change that may allow for a Dream Home for many potential buyers.

By

Dr. Mark Lee Levine, Professor of Real Estate, University of Denver