The fifty-year mortgage idea was floated by the Trump administration as a way to make home buying more affordable for the younger generations. While this may sound good on paper, it’s yet another way the older generation wants to saddle the younger ones with insurmountable debt. This is called “financial engineering” it’s the latest go to from the Baby Boomer generation that is entering the later stages of life… I mean power on this earthly plane.
You see, as things are currently, you have two options for a mortgage on a home, 15- and 30-year terms. Folks like Dave Ramsey and others rail against a 30-year loan, and he isn’t totally wrong. The problem is, we have a massive affordability crisis, as far as buying “your first home” is concerned. I say buy the place, if you can afford it, and you can always make extra payments toward your mortgage to build equity and own it quicker. Case in point, 10 years ago, I bought my first home, for $325,000. As of today, Zillow has it valued at $600,000. As you can see, starter homes are very expensive.
Enter the older generation. Having learned nothing from the financial crisis circa 2008, they now are floating a 50-year mortgage. This is the same group that floated and sold; interest only mortgages, negative amortization mortgages, NINJA (no income, no job, no asset) mortgages, and no down payment loans. This sunk the financial and credit markets so badly that banks needed federal government bailouts to stay in business. Foreclosures ran rampant and destroyed neighborhoods and cities. 15-17 years later we are not students of history, we just look for a new means to get to an end.
To be fair, this generation has been at it for a while now in regard to affordability. One thing William will tell you, I railed on the new 84-month car loan that replaced the 60-month car loan. This also had nothing to do with affordability. It was just a financial tool to get “you into that car you love so much.” It became not can you afford it, but how much can you pay monthly? We will adjust the dials in the finance department and make the numbers work. I do not know too many people who think it’s a smart idea to finance a vehicle for 7 years. Oh, check out what interest rate you will be paying, news flash it won’t be 0%.
Back to the 50-year mortgage, I ran some numbers, and it amounts to about a $300-400 savings per month in terms of a lower payment. This is based on a 30-year mortgage running about $2,600 which is common now. As you can see, the savings might help, but it comes with drawbacks. First, the interest rate will not be cheap as the bank will be holding the note for 50 years. Also, the age of the house will come into play. Buying that home built in 1960, it’ll be over 100 years old before the mortgage is 2/3 paid off! This carries significant risk for the bank as the asset could be falling into a state of disrepair. Also, you do not and will not build much equity over the life of that mortgage, so when you are looking to buy your bigger house, you won’t have much for a down payment. Just look at the amortization schedule. You will see the first 7-8 years is virtually all interest, not much toward principal.
The last thing to remember, the man pushing these mortgage ideas is none other than President Donald John Trump, a man who loves debt. Look it up, his corporation owes billions in loans. This is no shot at him, he made a ton of money in real estate, but he did it with the corporation holding the paper not himself. In this case, he is making you hold the debt personally. He has made zero attempts to cut the debt or deficit as President (this term or last), and a budget will never be a thing under him. He see’s things through the eyes of “as long as you can make the payment you are fine.” It’s the way his generation feels.
In closing, please think long and hard before you fall for these shenanigans put out by the older generation. The only thing they care about is wealth generation. The 90-day calendar types love it because this means home builders can sell more homes, banks can write more loans, and profits will go higher. They could care less about affordability; they prefer you locked into loan terms that won’t seem like a good move in a decade. This will not end well. I am happy there has been push-back on these mortgages. The truth is that some people will not be able to afford a home. You may not be able to afford that sports car, getting another credit card will not solve your problem. A class/seminar on budgeting/credit should be required.
Stop fleecing the younger generations. Be a student of history. We are entering a rough cycle in terms of affordability. Adding more years to the term is pointless. It’s time we grow-up as a country.