From AEI:
Buying a home increasingly feels out of reach for middle-income households—and for good reason. On a national level, house prices are up over 50 percentsince late 2019. Over the same period, 30-year mortgage rates have risen from 3.74 percent to 6.23 percent. Property taxes and hazard insurance have also risen sharply in the last few years. According to the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor, the median total monthly payment required to purchase the median-priced house is up a whopping 90 percent in the last six years. In comparison, median household income is up 29 percent over the same period.
Unfortunately, longer loans would help a little but hurt a lot. Most of the potential for 50-year loans to improve the affordability of monthly payments would be offset by higher mortgage rates. And because equity builds much slower with a half-century-long mortgage, buying a house with such a long loan would rob the homebuyer of the very wealth they are seeking to build. Overall, costs would far exceed even potential benefits.
In theory, a 50-year mortgage could make housing more affordable through lower monthly principal and interest payments compared to a 30-year mortgage. In practice, it won’t. Why? Government guarantors, private insurers and investors in mortgage-backed securities collectively set mortgage rates. Because this trio would carry more interest rate risk, prepayment risk and credit risk with a 50-year home loan than with a 30-year loan, they would charge more for the half-century mortgage.
Because of the same elevated risk, this trio currently charges higher rates for 30-year mortgages than for 15-year mortgages. There likely would be a similar difference in rates between 50-year and 30-year mortgages, and higher rates for half-century mortgages would offset most of the benefit of the longer term on the monthly payment. Under this scenario of similar rate differences, a person who buys a median-priced house today (about $410,000) with a five percent down payment and 50-year mortgage at 6.95 percent would save about $65 a month compared to a 30-year loan at 6.23 percent.
A 50-year mortgage doesn’t improve affordability if house prices increase as a consequence. In a supply-constrained market, a 50-year mortgage may simply increase purchasing power, which will quickly be capitalized into higher home prices. House prices need to rise just three percent due to the availability of the longer loan to offset that $65 in monthly savings. In this case, the primary result would be higher prices, thus benefiting sellers rather than improving access to homeownership.
And even if a borrower manages to capture some short-term savings, the homebuyer pays a steep price in lost equity. If a homebuyer stays in their mortgage for seven years, they would accumulate $5,400 in monthly savings from the lower monthly payment of a 50-year loan. However, because borrowers repay principal much more slowly in the longer loan, they would earn $31,000 less in equity over the same period compared to the 30-year loan. On a cash basis, they are out $25,600. Where did the money go? To pay that additional amount in interest.
This equity drain gets worse the longer the homeowner remains in the half-century mortgage. By year 15, the homeowner would have accumulated $12,000 in savings from the lower monthly payment but lost $87,000 in equity. For perspective, a borrower with a 30-year loan would own their home free and clear after making all the required payments over the loan term, but – after those three decades—a 50-year mortgage holder still would owe over $300,000 in principal, which is 75 percent of the original loan balance. The extra interest paid over the 30-year period is an astronomical $279,000. The households that can least afford to give up equity and pay more in interest are lower-income, minority, and first-time homebuyers.
