A 50-Year Mortgage Is a Terrible, Horrible, No Good, Very Bad Idea

Home affordability is a pressing issue. Young people often enter the workforce saddled with student debt, limited work options, and faced with exorbitant housing costs. For the millennial generation, the prospect of buying even a “starter home,” an option available to previous generations, has all but disappeared in most urban and suburban areas. The affordability problem touches more than just youth—blue collar workers, the foundation of this country without whose labor the economy would grind to a halt, fact made obvious during the early days of the COVID pandemic, no longer have the same opportunities either.

Efforts to address such an affordability crisis by exploring the viability of various options are a worthy endeavor, to be sure. But, as the intrepid detective of Hollywood fame, Jack Reacher, reminds us, “in an investigation, details matter.” The latest potential solution, which President Donald Trump proposed via social media on November 7, contemplates offering 50-year mortgages, up from 30 years—that is, increasing the time horizon for mortgages by two-thirds. Presumably, the logic motivating this argument posits that spreading out the mortgage over a longer horizon will lower monthly payments, increasing affordability.

Offering 50-year mortgages will do no such thing.

To repeat, the goal of making home ownership more affordable is laudable. But offering 50-year mortgages does not make ownership more affordable. At best, it makes mortgages more affordable. This policy preys on an unfortunate consumer tendency to buy a monthly payment rather than buying the property itself (a home or a car).

Most people who have shopped for a car will have likely received the question, “What sort of monthly payment would you like to have?” If you’re shopping for anything that requires a loan, and you get this question, stop right there.

You are not buying a monthly payment. This question conflates two products: the property (e.g., home or car) and the loan. The monthly payment just combines the two, masking the price you end up paying for the product you wanted in the first place. Sure, you might be able to get a lower recurring payment, but at what cost? Knowing the answer can inform the difference between a good and a potentially catastrophic financial decision.

The End of the Dream?

The American Dream, whatever vestiges of it remain, has always been about owning one’s home, not owning a monthly payment on a mortgage. Extending the payment over a longer period not only does not advance that goal, it actively undermines it; the longer the loan period, the smaller the proportion of each payment that goes to principal. This just means that you end up paying a higher price for the home. The longer payment schedule merely allows you to spread out the payment over a longer period in exchange. But that costs money, so let’s look at some numbers.

Suppose you want to buy a $500,000 home. Assuming you have the 20 percent to put down (congrats!), you will have a $400,000 mortgage. Your monthly mortgage payments will just depend on the interest rate you obtain and the term of the loan (usually 15 or more commonly, 30 years). Calculating the monthly payment, ignoring for the moment closing costs, home insurance, and other associated costs that one pays through escrow, is a simple calculation that one can do in Excel, either by hand or using the built-in payment (“PMT”) formula. The table below shows the calculations if you choose a 15- or 30-year mortgage. Note that a 15-year mortgage also commands a substantially lower rate (currently about 5.6%) compared to a 30-year mortgage (currently  about 6.4%), because the 15-year mortgage carries lower risk.

Table 1: 15 vs. 30-year Mortgages

With a 15-year mortgage, you face a higher monthly payment, but you end up paying less than half of the amount in interest. Assuming you pay off the 30-year mortgage at the end of the term, you will end up paying more in interest (about $500k) than the $400k you originally borrowed!

Now, let’s see what happens with a 50-year mortgage. The table below has the same two scenarios as above (Options 1 and 2, respectively), and two additional 50-year mortgage scenarios: (1) with the same interest as a 30-year mortgage, and (2) with the more likely increased mortgage of 7.3%. The increase in the rate associated with a 50-year mortgage would occur for the same reason that 30-year mortgages command higher rates than 15-year ones (higher risk).

Table 2: 15, 30 and 50-year Mortgages

Let’s look at Option 3, assuming the same 6.4% rate for 30- and 50-year mortgages. Yes, the monthly payment on the latter drops by $277 per month, from $2,502 to $2,225. Ok, you say, this is nice. But is it more affordable? Look at the cost of that lower monthly payment: over the 50-year length of the mortgage, you end up paying over $934k in interest to borrow $400k—that is, nearly a million dollars in interest alone!

But wait, it gets worse.

The mortgage rate will likely increase by raising the term from 30 to 50 years. Let’s say the 50-year rate is 7.3%. Then, not only are you paying the same monthly payment ($2,502, Option 2 vs. Option 4), but you’re also paying $1.1 million in interest alone with Option 4. You’re now paying more than double in interest while not even getting a lower mortgage payment. Guess who benefits here? (Hint, it’s not you.)

Adding Insult to Injury

Of course, you’re unlikely to carry the mortgage to term. This is where familiarity with the amortization chart helps. The average amount of time people hold a particular loan before moving or refinancing is 12 years. We can re-calculate the total amounts paid in interest and principal using that term. Keep in mind that earlier in the mortgage term, the majority of your payment usually goes to interest not principal. So, you’re not really gaining much equity.

Here’s where things go from worse to terrible.

Table 3: 15, 30 and 50-year Mortgages with 12-year Amortization

Look closely at how much of your principal you’ve paid off under these scenarios. With a 15-year mortgage, you’ve paid off just under 75% of your total mortgage of $400k (equal to $291k divided by $400k). With a 30-year term, you’ve paid off less than a quarter (equal to $79k divided by $400k). Now the terrible part: with a 50-year mortgage at the same rate as a 30-year mortgage, you’ve paid off less than $20k in principal in 12 years. In other words, even though you will have made a total of $320,371 in mortgage payments over that period, $300,631 of that will have gone to pay off interest and only $19,740 went to principal. You’ve gained less than $20k in equity from your payments. With the more realistic higher rate on a 50-year mortgage, you end up paying just $15k in principal. In other words, maybe, just maybe, you end up paying off the equivalent of your closing costs.

Ostensibly, this idea was intended to at least superficially appeal to the younger generation aiming to salvage some scraps of the dream of homeownership. Younger people tend to hold mortgages for shorter periods: as they build families they seek out more the requisite spaces. On that note, let’s look at the amortization schedule after holding the mortgage for five years.

Table 4: Five-Year Amortization Schedule

By taking a 50-year mortgage, you end up paying between $133k (Option 3) and $150k (Option 4), but only between $6,447 and $4,722 goes to principal! Over 95% of your payment has gone to interest. Again, you’ll walk away with next to nothing after the sale.

Let me emphasize. As Option 4 shows above, after paying your 50-year mortgage for a full five years, you will have managed to pay down the principal on our loan by less than five thousand dollars, even though you paid a total of over $150k towards your mortgage. You’re not really becoming a homeowner, you’re financing someone else’s investment vehicle.

When you buy a home, you generally hope to gain equity. This comes (1) from the portion of your mortgage payment that goes to principal vs. interest and (2) market factors. As the amortization schedules above show, the longer the term of your mortgage, the lower the percentage of your payment that applies to principal. That means you’re left open to the vagaries of the property market. You can actively improve the home in the hope to achieve a positive return on investment, but money that you could have used to do so now goes to paying down interest.

This might be the time you expect to hear that there’s a silver lining somewhere. No. Just more clouds.

Remember, because of the transaction costs involved, once you buy a property, you’re very likely immediately underwater. You’ve likely paid some closing costs to get into the mortgage. And if you changed your mind and wanted to sell the property immediately and hire an agent, you will end up paying around 3-6% of the total sales proceeds. Assuming you could sell the home for exactly the price you paid, $500k, that means you’re $15k-$30k underwater, plus the title costs.

Let’s look again at Option 4 in Table  3. After 12 years, you’ve paid $345k in interest but only paid off $15k in principal, just barely enough to cover a 3 percent agent fee. Not only that, the $100k you’ve put as down payment has done nothing over this time, unless the home prices have increased. The 50-year mortgage option just creates more mortgage-backed investment vehicles, not more homeowners.

Better Options Than 50-Year Mortgages Exist

I’ve skipped over some additional details, all of which tend to make this calculation even worse for potential homeowners. Of course, there are downstream effects as well. Locking people down in debt restricts their mobility, with second-order effects on labor markets. Suffice it to say, even if this idea were well-intentioned, it should be dismissed immediately. I would expect even the Abundance crowd to concur, as 50-year mortgages would counteract attempts to increase home supply. Yes, maybe we’d see more mortgages, but not more homeowners. And isn’t greater home ownership what the American Dream was supposedly about?

So what’s the solution? Lowering rates would help. Most homeowners with mortgages have rates below 5% and are unwilling to forego them without compensation. I hear the common argument that “well interest rates were much higher in the 1980s.” This misses the point. The issue isn’t as much with the size of the interest rate as with the rapid change in rates from less than 3% to north of 6%. People have locked in at lower rates, and now they’re wearing “golden handcuffs”. For example, financing a $400k loan at 3% means a $1,686 monthly payment. Increasing the rate to 6.25% raises the monthly payment by nearly $800 to $2,463. But not only have interest rates risen, so have home prices. So, instead of a $400k loan, maybe you now have to take out a $500k loan to buy the same or similar house. That means a $3,079 monthly payment. So, you can see that the same house now requires precariously close to double the monthly payment in this case. Even if people want to move, they stay put. This means a lot of shadow inventory is sitting out there, and lowering interest rates would go a long way to inducing it to come on the market.