11.20.25 - Is a 50 Year Mortgage The Answer for Home Buyers?

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Hi there, I'm Art Alvarez at Mortgage Works where we have the answers and they're on the house. Last week on our Mortgage Minute program, I covered a segment on 50 year mortgages, in case you hadn't heard, that's been in the news lately. Got a good response to that segment and several people had asked about, you know, showing you some basic numbers, maybe put together a simple chart to give you better information in terms of comparing the 30 year mortgage we use today with this 50 year mortgage proposal. Thought that was a great idea. So that's what I'm going to do now. First thing I did is I went ahead and just put together some very simple basic numbers because you know what, that's all it's going to take to really drill down and determine if this makes any sense at all. So that's what I did. I put these numbers together, put them on a piece of paper. So I've got a little bit of a chart here I'm going to show you and we're going to go ahead and pull it up now. First thing you're going to notice at the very top.

The header, I've actually got three loan terms. A 30 year, a 40 year and a 50 year. I added the 40 because that is available now in the discussions and the media stories and things on the news and so forth. Not hearing much about the 40 year loan, only 30 and the 50 that's being proposed yet. We have a 40 now and I thought it would be helpful that you be aware of that. And I show you the numbers of that option as well as the other two to get a better idea of the overall issue of loan term and how it affects your payment and your rate.

So I made some assumptions. 500,000 loan amount, 625 purchase price and a 780 score. For purposes of showing you the rates that are available, you'll see three columns. On the left it says available and it's a 30 year loan. In the middle it says available and it's a 40 year loan. And then on the right, proposed in a 50 year loan term. The first row is the interest rates right now, today, 500 loan amount, 780 score, 20% down. I can get you 6%, no points on a four year loan. Same parameters, same score, down payment. Loan amount 6 1/4. It's higher. 3/4 higher. Why? Risk premium. More risk because of slower principal reduction. Higher. I'm sorry, longer loan term, time value of money. So the rate's higher. Therefore it's reasonable. I would Argue to assume a 50 year loan will have a higher rate still than even a 40 year. And so you could see I made the assumption it would be a half a percent higher than a 40 year. I think that's reasonable to assume even more risk from slower principal reduction and then even longer repayment term time value money, the rate's going to be higher. So the next row though tells the real story. 6% 30 year loan, 2997 principal and interest. 4 year loan, 3016 principal and interest, 50 year loan at the 7 and a quarter rate that I'm assuming, which I think is reasonable. 3104 principal and interest. Well, if you notice the 40 and 50 year terms have a higher principal and interest than the 30 year term. And the reason is, yeah, the longer term should lower your payment, but the higher rate that those longer term loans would demand swallows up that benefit from the longer term and you end up paying more per month, not less. And we know that with Certainty on the 40 year middle column because that's available today. So it follows the 50 year loan would make that problem worse, not better. On the next row I've got the amount of principal reduction that occurs in the first month of each loan term. 30 year, 497. The first month 40 year loan only. 204, less than half. And then shocking look at the 50 year first month $83 principal reduction after paying $3,100 a month on a half a million dollar loan. That's puny, right?

And then the last row, I put that in there. Total amount of interest paid over the entire term. Don't worry about that number. No one ever pays a loan to term anymore. I don't think that's useful to consider. How much interest you pay over the entire 30, 40 or 50 years is worth the mental energy. So forget about that because you're not going to pay the loan to term anyway. So the bottom line here, as you see at the bottom, the 50 year mortgage is much ado about nothing. So when you hit the holiday cocktail party circuit, if the 50 year mortgage comes up, change the subject, talk about something more interesting. So that's what I have for you on this week's Mortgage Minute. My name is Art Alvarez at mortgageworks where we have the answers and they're on the house. So long.