Dear Johnny Q&A: Is a 50-Year Mortgage a Good Choice?
Thank you for the question! President Trump recently mentioned the possibility of offering 50-year mortgages. This news made headlines and received a mixture of feedback. The President stated it would be a good idea so more people could afford homes due to lower monthly payments.
Why I think it's a horrible idea:
1) Offering a 50-year mortgage does not lower the price of homes which is the real issue at hand. If the demand for homes rises due to this new mortgage option, then prices will rise, the exact opposite result of what new home buyers want.
2) Offering a 50-year mortgage does not fix people's money problems. Most people (not all, some just have bad circumstances and a tough life) suck at managing money, hence why they struggle to afford homes.
3) When you mortgage a home, you do not fully own it, the bank also owns a portion of it. Until the bank is removed from the deed, the house is not fully yours. Making more people homeowners, also makes more banks homeowners.
4) You are chained to a set payment for 50 years versus 15,20 or 30 years. Set payments are not fun, especially as you approach retirement age.
5) The average age of a first-time home buyer is now 38 years old. The average life expectancy is 78 years old. 38(age) + 50(mortgage length) = 88 years. You die still having a mortgage which means you always had a payment and now your estate owes the bank the remaining amount.
The number one reason why a 50-year mortgage is a bad idea.
The interest you pay to the bank is absurd!
Let's layout an example:
You mortgage $350,000 for 50 years at 5.5% interest.
Your monthly payment is $1714/month ($1,987/month with a 30-year)
In total you pay back $1,028,675 over the 50 years.
The bank makes $678,675 in interest (money you earned and gave them) This averages out to $1,131/month you pay in interest over 50 years.
(versus $365,414 with a 30-year)
The first 10 years you pay on average $113/month to principal and $1600/month in interest, you are not building equity or increasing your net worth, you are essentially renting from the bank. (and also have all the expenses of being a homeowner)
Is a 50-year mortgage a good choice? Unless the interest is unbelievably low, let's say 1%, no, a 50-year mortgage is a horrible idea.
The solution:
Rent longer, learn how to earn more money, and keep your expenses as low as possible. I recommend a 15-year mortgage with 20% down. If you cannot afford that, you are not ready.