The Issue With Trump’s New 50 Year Mortgages

Trump has been busy posting about a new idea for home buyers, >> posting an image on Truth Social showing great American presidents Franklin Roosevelt next to the 30-year mortgage and himself next to a 50year mortgage. >> That is right. 50-year mortgages have been proposed and they are creating some buzz. >> The 50-year mortgage does not make homes cheaper. In fact, it makes the housing crisis into a dumpster fire. That was Dave Ramseay's show, and they normally recommend the 15-year mortgage. So, it's to be expected that they have that kind of reaction to it. And it does sound quite ridiculous, paying off a house over half a century. But we have to remember that the 30-year mortgage was kind of a radical idea when it was first proposed, too. And so, the 50-year mortgage kind of feels the same. But not everyone thinks that the 50-year mortgage is a terrible idea. So, if you can save $300 a month by having a 50-year mortgage at your disposal and you can access home ownership, well, then it could be a viable option for many Americans out there. >> So, in this video, I want to break down the details of exactly how a 50-year mortgage would work and talk about who might benefit from such a mortgage and who wouldn't since there are certain situations where this could be a valuable tool. Hey, credit warriors, welcome to the show. My name is Ben Hedges aka the credit shifu and on this channel I cover US credit cards, personal finance, and luxury travel. If you like the sound of that, please subscribe. But let's get into the video. So, to look at why the 50-year mortgage has been proposed, we first should look at the history of the 30-year mortgage, which is the most popular mortgage product for buying a primary residence in the US. So, the 30-year mortgage dates back to the Great Depression in the 1930s. At that time, most mortgages were 10 years and they were not amortized, meaning you weren't paying off principal and interest in a fixed payment each month with the principal portion getting larger and the interest portion getting smaller as you paid down the loan. No, you paid interest only and then a lump sum at the end of the entire amount. But in reality, what happened was that many people didn't have enough money to fully pay off the mortgage after 10 years. So, they ended up getting another mortgage to pay whatever they couldn't pay on the first mortgage. Then, when the Great Depression hit and home prices collapsed, many people, especially those who hadn't paid back any principle on their mortgage, ended up underwater on their loans. This basically means that your home loan is for more money than your home is actually worth. Thus, when they went to get another 10-year mortgage to pay off the first one, no banks would lend to them because banks won't lend more than the market value. And at one point in the 30s, 10% of US homes were in foreclosure. So the government stepped in to help. Isn't there a reference to something there? >> I've always felt the nine most terrifying words in the English language are, "I'm from the government and I'm here to help." >> Well, anyway, the US government created the Homeowners Loan Corporation. They bought up all of those defaulted mortgages and reissued them as long-term fixed rate loans. Over time, the 30-year fixed rate mortgage emerged as the most popular product and the homeowners loan corporation gave way to Fanny May and Freddy Mack that we have today. So, the 30-year mortgage emerged out of a crisis. And fast forward to today, Trump seems to think that we are in enough of a housing affordability crisis that we need to extend it even more to 50 years. So, let's look at the effect of a 50-year mortgage on your housing payment, the amount of interest you pay over time, and what situations specifically would it be beneficial. So, how would getting a 50-year mortgage actually affect your monthly payment versus a 30-year? Well, if we go with today's average interest rates, the 30-year is at 6.18%. So, if we borrow $320,000 to buy a $400,000 house, we've got an $80,000 down payment. That's 20% and thus we have no mortgage insurance. We end up with a $1,955 monthly payment. You also pay a total of $384,000 in interest. So, you almost buy the house twice. If we do the same calculation over 50 years, we get a $1,727 monthly payment. So that's $228 less, but you would be paying a total of $716,000 in interest. So you're technically almost buying the house three times. So you do save a couple of hundred a month, which could mean the difference between buying a home and not buying a home for many people, but that is using the same interest rate. Would banks though actually charge the same interest rate for a 50-year mortgage as they would for a 30-year mortgage? Well, judging by the fact that they charge higher interest rates for the 30-year than they do for the 20-year or the 15-year, they would probably charge even more for the 50-year, unless the government stepped in and forced them not to. >> I'm from the government and I'm here to help. >> But let's just assume that they did. Here are today's average interest rates. The 30-year is 0.14% above the 20-year and 0.6% above the 15-year. So, let's say that to extend the term to 50 years, they add the same percentage as the difference between the 15 and the 30-year, and that takes us to 6.78% for the 50-year mortgage. That means our monthly payment will be $1,871. So, we're only saving $84 per month versus the 30-year mortgage. But for some people, this could be the difference between buying a house and not if it is borderline whether they can get approved for a loan because of their debt to income ratio. However, it is still worse overall because you pay $1,123,000 in interest, which is an insane amount on a $400,000 house. You buy the house almost four times. So, in principle, it's bad. All right, the 50-year loan is bad. However, let's take a look at some situations where it might be beneficial. Okay, so let's say that someone is young and their income isn't very high yet and this 50-year loan is the only way that they can afford to buy a house in the area they want to live in. But that area is a quickly appreciating real estate market. The average home appreciation in the US is 4.25% per year. Although in recent years, especially since co, many markets have seen much faster appreciation. But even if we take one of the more average growth markets like my home state of New York, for example, house prices have been up 50% in a 5-year time frame. So if you buy a $400,000 house with a 50-year mortgage and then sell it after 5 years, although you will have hardly paid off any principle in the mortgage, okay, the amount will be negligible, right? $2 or $3,000 probably you would have accumulated $200,000 in equity through the appreciation of the property. Okay, 50% in 5 years and you could use that for a down payment on your next property and perhaps your income has increased by that point so that you can get the 30-year or 15-year mortgage on that one. Or maybe you stay in the home, but you could cash out refinance into a 30-year. Maybe you take out $100,000 to start a business or invest separately into a rental property. If you had just rented that whole time, you would be $200,000 worse off after 5 years. Now, okay, maybe you would have taken your $80,000 down payment since that would now be freed up for you to use and perhaps you put that into Bitcoin and it went to the moon, but that is a big if. Okay, if you got the same appreciation as the house, okay, 50% over 5 years in whatever you put that money into, stocks or whatever, that would be $40,000 that you made versus $200,000. Okay, it's highly likely even if you had the intention of saving that 80 grand, you probably would have spent quite a bit of it over that 5 years. So having a house is kind of like a forced savings account where that $80,000 is locked up and you are earning interest at 50% over 5 years, not just on that 80 grand, but on 400 grand. So to use the 50-year mortgage as a tool to get on the housing ladder, make a load of money through appreciation, and then refinance to a more sensible mortgage later, especially if the interest rate goes down in the future, could be a very smart move indeed. So, I think people who are criticizing this are thinking about it all wrong. People in the US are only in their homes for an average of 13 years and then they move. Actually, for young people, if you buy a home in your 20s, that ownership period on average is even lower, just four to 5 years. So, I doubt anyone is actually going to be paying these 50-year mortgages to their whole term. Okay? There are simply so many options to get out of it. All right? 30-year mortgages have no prepayment penalty and so presumably the 50-year mortgage will be the same. Thus, you can pay them off early through a lump sum, like if you get an inheritance, say 15 years into your loan, you can just pay it off. You could pay it off through adding extra principle each month and you probably pay it off, you know, a few decades early. Uh, you can refinance out of them, okay, into a 30-year mortgage or a 15. And you can sell the house, which will obviously pay off the mortgage in full. and then you get all the equity that you'd earned through appreciation. So, my feeling is that the people who are criticizing these mortgages are not fully understanding them and that they are just a tool. Okay, but yes, if you took out a 50-year mortgage intending to keep it the whole way until the bitter end, absolutely stupid. Yeah, you pay for the house like four times. Crazy. All right, guys. That is the video for today. Now, if you are saving up for a down payment on a house or you just want to save up a large sum of money, one of the best things you can do is get that money working harder in the stock market. All right? And one app that I really like for investing in the stock market is Mumu. It is a commissionfree brokerage app where you can trade US stocks and ETFs, and you can even track the portfolios of some of the world's best investors like Warren Buffett and Nancy Pelosi. 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