President Donald Trump’s plan for 50-year home mortgages may seem like an unusual idea, but Americans are in the middle of a housing crisis that is also unusual.
There’s a massive shortage of homes for low- to middle-income families. In the past, that would have led to more homes getting built. But the market, so far, hasn’t seemed to respond the way it historically has.
Wages, meanwhile, have not kept pace with the rising costs of housing, putting what many see as a fundamental element of the American dream out of reach for many.
Enter the idea of the 50-year mortgage, a quick fix to lower monthly payments by spreading them out over a longer timeframe.
The lower monthly payment is the alluring part for many people, financial advisor Brian Pedersen with Pedersen Investment Group told Cowboy State Daily.
According to his calculations, someone putting 20% down at 6.25% interest would pay around $2,400 a month on a 30-year home loan. That payment would drop to $1,900 over a 50-year term, all other things remaining equal, resulting in a $500 per month savings.
But that’s not all. The way amortization tables are set up, down payments might not necessarily start at a traditional 20% either, meaning buyers might need less money up front.
“Instead of putting 20% down, the way that it is usually set up, you probably would only have to put 10% down the way the amortization table would work,” he said.
All of that could give people more purchasing power out of the gate.
That could make some sense for the right buyer, Pedersen suggested. Instead of buying “starter” homes, people could instead target something that’s larger and more ideal for their long-term needs.
“Like my beautiful wife and I, our first home didn’t have enough bedrooms because we couldn’t afford it,” Pedersen said. “But we knew we were going to have a bigger family one day.”
Once their first child was born, job one was trading up for a larger house so they’d have enough room.
With a 50-year mortgage, their thought process might have been different.
“Maybe with this, we could have bought the larger house in the first place,” he said. “Because you have lower payments, you have greater purchasing power with that. You’re able to spread it out a lot over time.”
Buyers could also, eventually, look at refinancing the loan to a lower term. Or simply accelerate payments on the existing loan to avoid refinancing costs, paying off the loan in a much shorter timeframe.
The other scenario that could make sense is the situation where a generational opportunity has arisen, like the ranch next door being listed for sale, Live Water Properties Associate Broker Latham Jenkins said.
“That’s a once-in-a-lifetime opportunity,” Jenkins said. “The way you would think about this might be, especially as it relates to Wyoming when the neighboring ranch becomes available, that it’s your chance to acquire it, and you’re going to gamble on the fact you’re going to have a chance to restructure this mortgage debt into a more traditional loan.”
Significant Trade-Offs
The trade-offs are also significant, both Latham and Pedersen agreed.
For one, it will take a lot longer to build equity in a home if the interest is spread over a 50-year amortization table.
“Mortgages are front-loaded with interest,” he said. “So if you have to go and resell the property for any reason, your cost of holding that property might exceed the cost of renting one in that timeframe. That’s further complicated by the transactional cost of selling property.”
After a 10-year stake in a home purchased with a 50-year loan, the equity stake would be just 14%, versus 24% for a 30-year loan. That would mean it takes longer to trade up or out on a break-even basis, much less walking away with some profit for the next purchase.
That factor makes it all the more important to carefully consider how long you’re likely to stay in any property purchased using a 50-year timeframe.
“We should also hope that, in the time to come, rates might drop back down into the fives, at which time refinancing into a more common product, like a 30-year, would become an option.”
That refinance, though, is likely to take place without a lot of equity in such a home, Pedersen pointed out. And it’s important to realize that even though the monthly payments are somewhat lower, the actual cost of the home is going to be much, much more expensive.
A $500,000 home, for example, would cost $886,000 over the lifetime of a 30-year loan, Pedersen said. That same home, over the life of a 50-year loan, cost $1.188 million.
Hedging Bets
Home ownership has been touted as important to society because it fosters financial stability over the long haul. Families with secure housing have better outcomes for all kinds of metrics, including their health and education for their children.
Critics of the idea don’t see a 50-year plan as much better, however, than renting a home. That’s because it just increases the risk of a health disaster or unexpected job loss coming along, making it difficult to keep up with payments.
Shark Tank entrepreneur Kevin O’Leary, for example, called it “financial engineering” that means borrowers would never really own their home, and might as well rent. In fact, rentals would likely be cheaper, because there’s no extra interest on top of the monthly payment, going straight to a bank.
On the other hand, the Trump administration has only said it’s working on the idea in a social media post. There were few details about the idea. It could be that the 50-year mortgage would come with other tools that have not yet been revealed.
Government, unlike a bank, is also a perpetual entity that doesn’t have a natural end date, the way individuals do. It could readily facilitate very long duration contracts and investments where a benefit takes decades to accrue.
On a macro level, such a move could be engineered to help free up capital for investments, while boosting savings rates on paper, ultimately putting downward pressure on interest rates. It’s a dynamic that could work without requiring the Federal Reserve to pull any particular levers.
A 50-year mortgage could also be seen as a hedge against further devaluation of the dollar, Pedersen said.
“You’re locking in today’s dollars as a hedge against the decline of the U.S. currency,” he said. “You’ve got this rate that’s based today on the value of the house today that you’re paying on over time.”
Home values will rise with future inflation, so it’s an investment that can help protect money against future devaluation.
“One major reason my house value went up is because we printed a bunch of dollars in 2020 and devalued the U.S. dollar,” Pedersen said. “All of this inflation is from printing dollars to justify leaving people at home and bailing out companies during the lockdown.”
That’s artificially inflated the value of things, Pedersen said.
“Now it takes more dollars to buy things, because there’s more dollars printed, so each one has less of a value.”
Still Doesn’t Fix Root Causes
Under existing federal laws, 50-year mortgages aren’t allowed, so a move on this front would likely require an Act of Congress to achieve, making it potentially problematic, coming on the heels of the longest shutdown in American history.
Prominent Democrats, as well as some Republicans, have already pushed back on the idea of 50-year mortgages, as well, saying that it will do nothing to address the root causes of the nation’s affordable housing crisis.
Those arguments spoke to Jenkins and Pedersen as well.
“We look to a free market to try and keep prices in check, between just supply and demand,” Jenkins said. “But when you extend a mortgage to 50 years in an effort to enable buyers to afford today’s prices, it’s not allowing the market to do what it needs to do and be responsive to the fact that it’s you know, it’s pricing that is outpacing demand.”
Part of the true problem with owning a home, which so many see as a critical part of the American dream, is devaluation of American currency, Pedersen added.
“Really the only way to get the devaluation is for them to address our debt,” he said. “And I have little faith in our government to do so. But that is the path. It’s the same for all of us. If you are over-leveraged you become a bad investment, and the U.S. is over-leveraged, so our dollar has devalued.”
Renée Jean can be reached at renee@cowboystatedaily.com.
