In a social post on Saturday, President Trump floated the idea of a 50-year mortgage to increase housing affordability, but the idea received a frosty reception online. One reason is that extending the loan term so long ends up costing a lot more in interest over the life of the loan, while only saving a few hundred dollars off the monthly payment.
You should also expect a higher mortgage interest rate than what you get with a 30-year fixed loan.
On Sunday, FHFA Director Bill Pulte responded to the comment with this message: “We hear you. We are laser-focused on securing the American Dream for YOUNG PEOPLE and that can only happen at the economic level of purchasing a home. A 50-year mortgage is simply one potential weapon in a WIDE arsenal of solutions we are currently developing. STAY INFORMED!”
What is the interest rate on a 50-year loan?
How much would a 50-year mortgage ultimately cost home buyers? To answer that, we need to take into account the mortgage interest rate and the interest paid over the life of the loan, and compare that with the benefit of a lower monthly payment.
HousingWire lead analyst Logan Mohtashami outlined what the interest rate on a 50-year loan might look like.
“Traditionally, the longer the amortization, the higher the mortgage interest,” says Mohtashami. “If we look at the difference between a 20-year mortgage and a 30-year mortgage, the best-case scenario for a 50-year government-backed loan product would most likely see interest rates between 0.42% and 0.57% higher than a 30-year fixed mortgage.
“Using the 30-year fixed mortgage rate at the end of Friday 6.32%you could be looking at a mortgage rate of 6.74%-6.89% for a 50 year loan. It could be higher than that, but that is the best case scenario I see,” Mohtashami said.
If we take that 6.32% for the 30 years and use 6.80% for the 50 years, these are the payments according to the Fannie Mae Mortgage loan calculatorin different price ranges. This calculates only the principal and interest payment, as the remainder of the monthly payment (taxes and insurance) varies too much by location to provide a valuable average.
Below is another representation of the difference in interest payments over the life of the loan between the two loan terms.
Regulatory challenges could lead to higher rates
The interest rate difference can be much greater depending on how a 50-year mortgage is structured for the market. After the great financial crisis, Congress approved the proposal Dodd-Frank Wall Street Consumer Protection Act which established the types of mortgages Fannie Mae and Freddie Mac would purchase on the secondary market.
“A 50-year mortgage would not directly violate the Dodd-Frank Act, but it would not qualify as a mortgage. Qualified mortgage (QM) under the Act’s Ability-to-Repay (ATR) rules,” said James Brody, managing partner at Brody Gapp LLP. “Current regulations limit QM loans to a term of 30 years, so any loan that exceeds this term falls outside the standard.”
“In practice, this means that a 50-year loan can only be made as a non-QM mortgage, which lacks the regulatory safe harbor protections of a QM and typically has higher interest rates. Unless the ATR rules are changed to include 50-year terms, lenders would not be able to sell these loans to the GSEs (Fannie Mae and Freddie Mac), severely limiting the product’s liquidity.
“In short, while not illegal, a 50-year mortgage has very limited marketability in the secondary market under the current Dodd-Frank framework,” Brody said.
Related
#50year #mortgage #cost