Is a 50-Year Mortgage Smart?

The big news is that Trump is advocating for a 50-year mortgage as a way to help individuals get into a home…BUT is that a good idea?  There are a lot of opinions out there, but as always, I like to look at the facts.  Every situation is different, and while personally I would not want a one of these, let me help you see through the numbers to figure out what is best for you.

Let’s just start with looking at some basics so you have a point of reference.

• Median Home Price: $350,000

• Down Payment: 10% or $35,000

• Rates: 15-year = 5.5%, 30-year = 6.25% 50-year, let's assume a modest 6.5% (there are no stats on this now, so I’m going to be generous here)

With those details above, your mortgage payment alone on each of these would be:

15-Year: $2,574

30-Year: $1,940

50-Year: $1,776

The first thing you will notice is that there is not much of a difference in payment between the 30 and 50…it is less than $200.  Is that what is keeping you out of a house?

On the flip side, while the payment is not that much, the interest will be. With these stats, the cost of interest is double over the life of the loan. In 5 years, the total interest will be $101,634 on a 50-year mortgage; now the 30-year is not much better at $95,383.  Go to 10 years, and that goes to over $17,000 in interest. 

Back to my question, is $200 going to keep you out of the house and prevent you from saving 15% towards retirement?  If the answer is yes, then go ahead and get the 50-year, knowing what you are getting into, with a plan to refinance it down as your income increases. 

The latter part of the statement is the key part; a 50-year mortgage could help you get into a house, but it should not be your plan to keep that for 50 years.  Most people refinance their home usually around 5-10 years to capitalize on rate improvements or just to move in general.  I did that several years ago. I went from a 30-year down to a 15-year mortgage and shaved 7 years off my mortgage while only increasing my payment by a few hundred dollars, thanks to the rate decrease.

Now, note, I did not talk about that 15-year mortgage number very much.  I know there are some that advocate for it, and personally love the benefits, but know it is not reasonable. After all, the payment above is over $500 more than the 30-year option, despite the lower interest rate. That alone makes it more difficult for most.  If you can find the right house that sits within a 15-year mortgage, allows you to still invest, and does not leave you house poor, go for it.  But for most first-time home buyers, find a reasonable house that you can afford, keep investing, and keep growing your income.  If the rates get to the right point, then do what I did, but do not feel obligated to at first.

My stance the 50-year mortgage is not a great idea in my opinion. The interest is considerable, but if you can use it as a tool to get into a home sooner rather than later, go for it, just plan to refinance when rates drop and reduce the length of that beast. In addition, do not use this new mortgage to get a bigger, more elaborate house.  When home shopping, be wise, get something reasonable, and live on less than you make.  Your future self will thank you!