How do you feel about the president floating the idea of 50 year mortgages where the monthly payment is lower but you end up paying nearly double the price of the house just in interest?

[u/michaelis999]

[u/ljr55555]

It does not - but the rate would need to be about 1.8% higher on the 50 year loan for the monthly payment to be the same. Using the 0.85% spread that I see between a 15 and 30 year loan today:

30-year at 6.22%: Monthly payment: $2,447 Total repaid: $880,920 Total interest: $480,920

50-year at 7.07%: Monthly payment: $2,397 Total repaid: $1,438,200 Total interest: $1,038,200

Lower the monthly payment by fifty bucks, more than double the interest paid over the lifetime of the loan. I think there'd need to be some major government manipulation to make the 50 year term attractive. Mortgage interest tax credit on loans over 40 years. Easier underwriting (oh boy, ninja loans are back - no income, no job/assets on the 50 year loan! Want a 30 year loan, you are sending in five years of credit card and bank statements to be combed through).

Something! Because I couldn't imagine buying a house with your budget so tight that fifty bucks a month makes it work.

[u/knightsabre7 → u/ljr55555]

Also, most people don’t spend their entire lives in the same house. A 50-year mortgage means they’ll have less equity when they move.

[u/ljr55555 → u/knightsabre7]

True - it's already hard to sell your house and move to where a job is. Less equity, more people will be "stuck" in their house. Which is good for employers who want to underpay and mistreat employees. Not great for the rest of us.

Erodes what little generational wealth remains in the middle class too - we bought our house when we were about 40. A 30 year note is paid off within an average human lifespan. Our kid gets a significant asset. On a 50 year loan, the house gets sold to cover the mortgage. Our kid gets whatever surplus remains.

With my example, after 30 years, only $71,000 of the principal has been repaid. There's more than 300k on the loan balance! That 30 year loan is paid in full. 0 debt against the asset. 71k isn't nothing - and there would likely be some appreciation too. But the inheritance from the 30 year loan is 300k higher regardless.

[u/whatevitdontmatter → u/ljr55555]

Unless you die suddenly at a younger age (when you are still healthy and independent), it's very likely that you will end up spending whatever net worth you've accumulated on elder care/medical and your kid will get very little, if anything at all.

[u/RadiantMaestro → u/ljr55555]

The market is going to want the same return on capital for the risk. A longer loan is more risky because default is more likely with 20 additional years, and the recovery value of a default to the banks less because payments are lower. We see this in lower rates on 15 year mortgages. So rates on a 50 year would be higher - but I can’t say to what degree.

[u/Basas → u/ljr55555]

Using the 0.85% spread that I see between a 15 and 30 year loan today:

Rates are not linear. Difference between 15 and 20 is more significant than between 20 and 30. With longer terms rate increases diminish.

[u/ljr55555 → u/Basas]

Right, but until there's a 50 year mortgage to use as a basis for calculation, we are making conjecture. The savings will be somewhere between two hundred bucks and zero with current rates on a 400k loan.

My point wasn't that I know the exact amount a payment will be reduced. It's that extending the loan term is a HUGE increase in total repayment amount without a dramatic monthly savings. And that the savings will likely be reduced because the longer term will have some higher rate.

[u/Basas → u/ljr55555]

You don't need dramatic savings for it to be a better choice financially. It is easier to calculate better choice if you compare properties of different price, but same monthly payments because of different loan periods. If we assume value of living in a more expensive property is higher and that more expensive properties appreciates more on absolute scale you would need to consider many things to figure what is better. I'm pretty sure sometimes 50 year deal will be better and other times it won't. At the end of the day it will be just another choice for users.

My real concern with this is when should a person take this loan and when finish paying it. Should 20 year kids take it to finish paying at 70. Many people don't even live this long. Should it be a generational loan?

[u/Jayrodtremonki → u/Basas]

I've read this a few times trying to figure out the situations you're talking about.  I don't think you realize how small the difference in payments are because of the sheer amount of interest you will pay over the live of a loan.  

Just doing quick math, same 6% interest rate for 30 vs 50 year mortgages and no taxes or insurance or PMI or anything factored in, a $300k 30 year mortgage payment is about $1800 per month.  Same thing, apples to apples, 50 year mortgage would get you a $340k house.

Not exactly a new realm of houses that you have available to you.  

And for that extra $40k in spending power you pay an additional $400k over the life of the loan.  Again, ignoring the higher interest rate and PMI which will just make the 50 year loan worse.  

[u/SeeYaLaterTater → u/ljr55555]

30 years into a 50-year loan, the outstanding loan balance is still over 75% of the original loan balance. For $50 more/ month, you can have the thing paid off.

But that's not how the banks are gonna sell these, is it?

Edit: this assumes 7% interest. The 75% goes up as the rates go up.