While the immediate allure of lower monthly payments is undeniable, a 50-year mortgage may prove to be a financial trap that costs borrowers an additional half-million dollars in interest while stalling equity growth for decades.
The following article first appeared on Real Boston.
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As policymakers debate whether to support 50-year mortgages, home buyers should look beyond lower monthly payments and consider what a 50-year loan could cost over its lifetime.
The idea behind today's standard 30-year, fixed-rate mortgage is to pay it off during your working years. A 50-year loan would stretch that commitment by two decades. Under current federal rules, Fannie Mae and Freddie Mac cannot insure mortgages longer than 30 years, so any future 50-year products would likely sit on the margins of the market unless Congress changes existing law.
Proponents point to the appeal of smaller monthly payments. On a hypothetical $420,000 home with 20 percent down, one analysis found that at a 6.3 percent rate on a 30-year loan, principal and interest run about $2,080 per month. A 50-year loan likely would have a higher interest rate. At a 6.8 percent rate over 50 years, that payment drops to roughly $1,970, saving about $110 a month. The $110 reduction allegedly would allow an estimated 3.4 million more households to qualify for a median-priced home, according to the National Association of Realtors.
But long-term costs paint a markedly different picture. A borrower on a 50-year mortgage can pay hundreds of thousands of dollars more in interest than a similar borrower on a 30-year loan.
For example, with a $400,000 loan amount, a 6.3 percent mortgage interest rate, and a 30-year note, the monthly payment would be $2,476, and the total cost would reach $891,321. Assuming the same $400,000 loan and a 6.8 percent mortgage interest rate, the monthly payment would be $2,346, and the total cost would reach $1,407,423. In the above scenario, the borrower would pay $130 per month less but would pay more than $500,000 in additional interest over the life of the loan.
Equity would also build more slowly. Some modeling suggests it could take around 30 years on a 50-year mortgage to reach equity milestones that a 30-year borrower might hit in about 12 to 13 years, and nearly 40 years to pay off half the loan. Considering the average first-time buyer is now roughly 40 years old (see below), that raises concerns about carrying mortgage debt well into older age. The loan might outlive the borrower.
Critics, rightly, note that longer loan terms do not address the core problem: a shortage of homes, especially at lower price points, is what makes housing so expensive. Greater Boston and many parts of the United States need more housing. Easier financing may increase competition for the same limited inventory, keeping prices elevated.
If 50-year mortgages become a reality, consumers must compare total interest over 30, 40, and 50 years. Home buyers need to think realistically about the pitfalls of taking on such a lengthy loan.
Homeownership is still one of the most reliable ways for families to build long-term wealth, but a 50-year mortgage changes the calculation.