A 50-Year Mortgage – Really?

By Thomas Kestler

The American dream of home ownership has become increasingly more remote – especially in northern Virginia. In NOVA, the average cost of a single-family home is over $800,000. For a first-time home buyer, the challenge is not only the increasing cost of homes, but the challenge of coming up with a downpayment of $80,000 or more.

The president recently mentioned he had a team examining the possibility of longer home loan terms, perhaps 50-years. This is a significant change from the 30-year mortgages most people are familiar with. It’s all about “affordability." Although a 50-year mortgage has gained quite a bit of interest, they are not currently available in the United States. However, the potentially lower monthly payment sounds lovely but, drawing from one of my earlier articles, here’s “the rest of the story.”

If we consider a $500,000 mortgage at a competitive rate of 5.00%, the traditional 30-year mortgage would cost $2,684/month (principal and interest). The 50-year equivalent would be $2,271/month – a $413/month (apparent) savings. When you peel back the onion and dig into the math, the rest of the story is frightening.

Consider the chart below assuming a 5.00% interest rate.

In my article, Do You know Where the Squeeze Is, I talked about the “Pop” and the “Squeeze." If you see something that “pops” out to you like a $400/month savings, be sure you identify the “squeeze." I can pick out three “squeezes” right off the top.

1. Over the term of a 50-year mortgage, you’ll pay almost $400,000 more in interest.

2. With a 50-year mortgage, there’s a good chance you’ll be making payments well into retirement.

3. In an amortized mortgage, you’re paying more interest in the beginning and more principal in the end, if you want to want to sell in 10 years, you’ve paid over $272,000 in payments and have only accumulated only about $29,000 in equity.

There are other things to consider as well. Under current law (the Dodd-Frank Act) loans longer than 30 years do not qualify for purchase by government- sponsored enterprises like Fannie Mae and Freddie Mac. Limiting their availability and increasing lender risk.

Another consideration is that rates on a 50-year mortgage might be higher to offset the increased risk of a longer loan period.

Finally, a borrower with a 50-year mortgage would have significant risk in the event of a big real estate slump like we had in 2008-20012. A decline in market value could put a borrower underwater for years.

By the way, a similar argument can be made for long-term auto loans. While the numbers are smaller, the math gets worse. A house (theoretically) is an appreciating asset, where a car is a depreciating asset. Bottom line here, if you can’t pay off a car in three years or less, you can’t afford to buy that car.

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Tom Kestler has been involved in the financial planning field for over 45 years. He is a graduate of Millersville State University and the College for Financial Planning in Denver, Colorado (for which he has acted as an adjunct instructor) and carries the Certified Financial Planner (CFP) designation.

He has also been awarded the Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Mutual Fund Counselor (CMFC) designations from the American College in Bryn Mawr, PA. He was the founder of Kestler Financial Group, Inc., a firm which specialized in the marketing of financial products and services to over 5,000 independent representatives throughout the United States. Kestler Financial Group was acquired by Highland Capital in 2018.

Mr. Kestler carries Life, Health and Variable Products licenses in several states and provides consulting services to insurance companies on product design and development. He also acts as an expert witness in securities and insurance litigation cases.

Prior to his retirement, Tom served as VP Advanced Sales at Highland Capital, and also CEO of Branch Development Partners, an Office of Supervisory Jurisdiction (OSJ) for Securities America, Inc. (now Osaic), an independent securities broker/dealer.

Tom is teaching our Financial Wellness Course— the next class is scheduled for Monday, January 26th. Sign up today!

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