The backlash from President Trump’s suggestion about creating a 50-year mortgage was fast and furious. Inman’s headline, “Trump’s 50-year mortgage is ‘a big nothingburger’ for ” summed up the anger. Nevertheless, when your buyers ask about a 40- or 50-year mortgage, you must be prepared to explain why these products are one of the most costly and devastating ways banks can transfer your buyers’ wealth into their coffers.
A 50-year mortgage may be one of the worst financial products ever conceived of for consumers. Rather than reducing affordability and debt while also helping owners build equity by paying down their mortgage, a 50-year mortgage does the exact opposite.
Here are eight reasons that explain why a 30-year mortgage is a better choice than a 40- or 50-year mortgage.
1. Insane amount of additional interest paid to the lender
To give you an idea about the actual cost of 30-, 40- and 50-year mortgages, here are the actual costs for each type of mortgage over the life of a $400,000 fully amortized mortgage at 5.50 percent.
While the lower payment saves $312 per month, the annual savings of $3,744 translates into an additional 89.5 percent of the loan that the bank gets paid. Rather than helping the homeowner build equity that could fund college and retirement and build intergenerational wealth, these products snatch away those opportunities.
2. Being in debt forever
The median first-time buyer today is 40. A 50-year mortgage means they will have payments until they’re 90, provided they live that long. The only entity that wins here is the lender with their 50-year amortization table.
3. Monthly payment savings that go poof!
When I was looking at the financial calculators that did 50-year mortgage loan amortization, almost all of them increased the interest rate by ½ to 1 point above the 30-year amortization. Those extra costs wipe out the buyers’ lower monthly payments while adding two decades of additional interest. Lenders actually win twice with higher rates and longer streams of income.
4. 11 more years of private mortgage insurance (PMI)
The additional PMI on a 50-year mortgage may result in higher payments than 30-year mortgages.
The example below assumes a 90-percent 30-year fixed mortgage of $400,000 at 5.50 percent. Assuming prices stay flat (no appreciation or depreciation in the property’s value), each table shows that at one point in the amortization, the buyer will reach 20 percent equity that eliminates the PMI.
- In the case of the 30-year mortgage, the borrower would have a 20 percent equity position in year seven.
- In contrast, with a 50-year mortgage, borrowers wouldn’t reach 20 percent equity until year 18 — that’s 11 additional years of PMI!
According to Waterhouse Mortgage:
Typically, PMI fees range from 0.5 to 1.5% of the original loan amount, per year. So, if you take out a $400,000 mortgage, your PMI costs may range from $2,000 to $6,000 per year (or roughly $167 to $500 per month).
Here’s the real kicker: In other words, a buyer who obtains a 50-year mortgage has a high probability of paying up to $200 more per month, plus paying an additional 20 years of interest.
5. Lenders front-load interest payments
Very few borrowers realize that the amortization tables for 30-year mortgages have them paying off 50 percent of the interest during the first 10 years of the loan. That’s one reason banks encourage borrowers to refinance.
This allows the bank to restart amortization, since it collects another 50 percent of interest (plus all the loan fees and servicing) over the next 10 years.
With a 50-year mortgage, the lender is not only picking up the higher interest rate, servicing fees and PMI for an extra 11 years; they’re also getting most of their money up front, which explains the slow reduction in principal you see in the tables above. As one commenter noted, “The 50-year mortgage rewards banks and ordinary buyers get hosed.”
6. Massive opportunity costs
When the lender devours the borrowers’ income for an extra 20 years, that money could have been invested in a rental property, fractionalized real estate investment or REIT, where it would be growing rather than being paid out in interest to the bank.
7. The retirement nightmare
Most Americans plan to retire debt-free by 65. With a 50-year mortgage, they’ll still be making mortgage payments through their 70s and well into their 80s, the very time their income declines, and healthcare costs increase.
New data from Harvard University shows that more Americans are entering retirement with mortgage debt with 30-year mortgages, so extending the timeline will further complicate this issue.
8. The psychological and life trap
Fifty years of payments crush mobility, making it harder for borrowers to relocate for jobs and family needs and adding to the mental weight of carrying 50 years of debt.
One of the most important roles a buyer’s agent has is helping their buyers to make the best possible decision about the property they purchase.
While agents can’t give financial advice, you can share the documented facts in today’s column to help your buyers understand that the only entity benefiting from a 50-year mortgage is the bank. The bottom line? Run, don’t walk, to a 30-year (or even a 20- or 15-year) mortgage.
Bernice Ross is president and CEO of BrokerageUP and RealEstateCoach.com, the founder of Profit.RealEstate and a national speaker, author and trainer with over 1,500 published articles.
