Will Trump’s mortgage plan save homeowners money?
Could a 50-year mortgage be the key to unlocking affordable housing?
That’s the debate among real estate experts after the fact that President Donald Trump promoted the idea of improving housing affordability, especially for first-time buyers who are struggling with rising prices and high home values.
Most loans have terms of 30 years. The goal of appreciating them by 20 years would be to lower affordable monthly payments for prospective homeowners — and help jump-start a sluggish housing market.
On the face of it, the idea of a 50-year mortgage can be promising. But experts say long-term debt could pose a bigger risk to consumers in the long run. While lower monthly payments on a longer-term loan could certainly decrease Americans’ overall monthly expenses and free up cash for other costs, a 50-year mortgage “is no silver bullet in terms of improving housing affordability,” says Ken Sisson, associate broker at Coldwell Banker Realty in California.
The real impact of a 50-year mortgage on monthly payments
The main argument in favor of extending the payment period is that it can reduce the monthly monthly payments. Lower down payments can make it easier for small buyers to enter the market and win over owner-occupiers.
For example, a 30-year, $400,000 mortgage fixed at 6.22%, Freddie Mac’s current, has a monthly payment of $2,455 (excluding tax and insurance).
The same loan over 50 years at the same rate would have a payment of $2,171. That’s a savings of about $300 every month.
However, those eye-popping numbers may add up to reality. Just as the rate of interest on a 30-year mortgage is higher than that of a 15-year mortgage, the rate on a 50-year mortgage is likely to be higher than that of a 30-year mortgage.
No one knows how high it is, but it takes the difference of 0.70% – which is the current gap between the 30- and 15-deductible assets – the monthly payment given by $79.
Even Trump has admitted that the savings on a 50-year mortgage may not be huge. Talking about FOX News’ The Ingraham Angle On Monday, the President said “not really, as a big deal,” adding that “it might help a little.”
Without a clear idea of how much money can be paid to earn, it is doubtful how many buyers will be able to take advantage of the opportunity in the long run. Joel Berner, senior economist at Realtor.com, says he believes lenders are “acknowledging that loans can be very profitable.
The risks associated with such a long loan term, on the other hand, can affect a larger group of lenders.
The downsides of 50-year property
Experts say there are risks involved in relying on extended payment terms alone to address the problems facing consumers in today’s market.
For example, a 50-year mortgage, according to Berner, is viewed as lacking sufficient inventory to meet needs or help reduce home values. In fact, Berner says he believes that if most lenders weren’t accepting this loan, the subsequent increase in demand would actually drive more competition and send home prices higher.
“Everything [it] Are you exploiting buyers, make it easy for them to … Explain about the same number of homes on the market, “said Berner.” That drags down prices, and all the money goes out the window. “
Another concern relates to the role of the home in building long-term wealth through home equity.
A Realtor.com analysis estimates that at the end of ten years, the borrower would have paid off enough principal to collect private equity insurance or reduce the private mortgage loan or apply for a home equity loan.
With a 50-year mortgage, that would drop to just 14%, severely limiting the options for refinancing.
By the same token, a rising interest rate and a new repayment period mean that the homeowner will end up paying more interest for the full term of the loan. Some rates double the amount of total interest paid on the short loan.
Homeowners can find and sell if home prices start to drop. Because the principal borrowed every 50 the loan will be paid gradually, a large drop in home prices can leave the property under water, or because of more than what is important. This will leave the owner with very few options if they run into financial stress.
Finally, while the idea of a 50-year loan can be seen as a potential solution to America’s income problem, the Sissonons note that the word “savings” is not a right to associate with long-term loans.
Instead, he says, “The whole idea is simply to taint the payment of the balance you owe and, in doing so, it is more expensive in terms of payment.”
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