Are 50 Year Mortgages a Good Idea? Here's What to Know

In this episode of Friends Talk Financial Planning, we talk about whether a 50-year mortgage is a financially smart idea, and if so, who would benefit the most from it. Some people argue in favor of 50-year mortgages for increased accessibility and inflation protections. Others argue against them for concerns about equity and other underlying issues. Don't miss this opportunity to parse through the advantages and disadvantages of 50-year mortgages!

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

TRANSCRIPT:

John: Hey, Bridget. This week President Trump in the White House announced plans for a 50-year mortgage in addition to the 30-year mortgage being the long-term option today. I've done a little bit of digging into it, but I'm really interested in finding out what you think about this. Have you paid attention to it much at all or done any math yet?

Bridget: I haven't done any math, but we're really familiar with mortgages so I think we can speak to this and talk about what the pluses and minuses of this could be. All right, let's start with the first big plus. We like mortgages for their inflation protection. So that means you buy a house, whatever it is, it might seem expensive, and then you get your monthly payment.

And then the only possibility for that is for it to go down. So as inflation goes on, you keep that same amount and it starts looking cheaper and cheaper. I think you've been a beneficiary of that right now because you bought a house a long time ago.

John: I did.

Bridget: So now it's interesting because we'd been talking about 30-year mortgages and inflation protection for all those years where there really wasn't much inflation. And so, people didn’t really know what we were talking about. And now it's like, “Oh, I get it.” So with a 50-year mortgage it's really going to help with that situation.

John: It sounds like your initial reaction anyway is pretty favorable towards those longer mortgages. Despite the fact I have two 30-year mortgages on the two properties that I own, and I believe in them, my initial reaction was more negative. But I do agree that inflation protection is a great deal long term. The other thing and it's kind of tied with that inflation protection, I think you alluded to it, is that as I look at it, the only place where the little guy has a leverage over the bank is a long-term mortgage.

And what I mean by that is that the bank can never change those terms, assuming that the terms would be the same as the 30-year mortgages. The bank is agreeing to the terms, and we can always pay it off early or pay more on it or whatever. We can't pay less, of course. But we've got flexibility. If I inherit a bunch of money, I can pay the house off if I want to. Or if the interest rate environment changes, I can pay the house off if I want to. But they can never go the other direction. And think about what happens in this inflation protection that you're talking about.

Let's say the rate on the 50-year mortgage is 7%. Well, if inflation goes way up, I mean you and I were in the work world when CDs were paying 8%, 9% or 10% interest. If I'm getting 10% on a CD and I'm paying 7% on my mortgage, golly, I'm pretty happy about that. I'm in no hurry. Think about that means from the bank standpoint. They've given me money at 7%, they're making 7% over here, but in order to get deposits they're paying 10%. I mean they're behind. It's the one place where regular people have an advantage.

So for those reasons, I mean, that's no different than the 30-year mortgage. And it just stretches it out and gives you a little bit more power. I like that side of things. I guess for me, one of the big things that I'm not as excited about is as it stands, most people don't live in their houses for very long. I've been in my same house for coming up on 30 years here, but most people move, I don't know the statistics, every 7 or 10 years—some shorter number. So does it give you some leverage against inflation? Oh yeah, it does. But most, I'm a little bit different than the typical person. So even though I could get a 50-year mortgage, if I'm going to plan to move every 5 to 10 years, does that really give me that advantage? I'm not sure that it does.

Bridget: Yeah. The other thing is I think the big downside is that it's going to take you forever to build up any equity.

John: Right.

Bridget: So the equity in your house, if you actually end up wanting to move or something like that, you're just not going to have that much there. And I'm not that huge of a fan of thinking about houses as an investment, but they are a big part of people's net worth. You're saying, okay, this is a part of my net worth that's going to take forever to grow.

John: Yeah. And you think about how if the value of the house goes up, it doesn't matter if you have a mortgage or not. But those mortgages are so front loaded because the interest payments all come up front, that again it’s not a big deal in most cases but as you start to push it out farther and farther there can be downsides. And again, if people move every 10 years, let's say that that puts you behind a little bit on things.

Bridget: Yes. There’s a lot of people who think about income wealth inequality in the country and they say that part of the reason is because of the housing market. And availability of 50-year mortgages I think would make it worse.

John: How so? Tell me about that.

Bridget: People will be building up less wealth in their house. Houses are really where the average person builds up a lot of their wealth. And if you're going to build less wealth if you have a 50-year mortgage.

John: Well, I'm going to take the other side of that one, and I hear what you're saying. If you think of the mortgage pay down and the building up of wealth by paying down the principal that's 100% the case. I mean, it's math; you can't argue with that. Most people move, there's some statistic, every 10 years.

So you look at the first 10 years of a mortgage schedule, and you're not paying a whole lot of principal on a relative basis. Where does the wealth get built? My $400,000 house is now worth $500,000. I've got $100,000 of equity even if I've paid off zero. If I got this interest only mortgage and my $500,000 house then goes to $600,000, now that appreciation side of things I think would still be relevant.

Bridget: Yeah. Your thought is that the appreciation is a bigger part of the wealth accumulation than paying off a little bit of the principal every month.

John: Absolutely. Again, if you're half a million-dollar house goes up by 5%, that's $25,000 more equity next year for doing nothing. Regardless of what you pay down (I would have to look at the scales or the payoff schedule), you're not putting $25,000 of equity in on a consistent basis until very deep into that mortgage. The thing I thought you were going to talk about affecting wealth inequality was just making it affordable.

The News this week has been about making things more affordable because if you stretch out your payments over 50 years, your payment is lower. Again, that’s just math; the payments are lower. However, I think that the evidence really shows it's not the payments necessarily that are the issue. It's a supply issue. I can afford a house, but I can’t find one. I saw something earlier this week that said there's something like a million fewer houses than are needed in the United States in order to fulfill the demand, enough supply for the demand.

It’s basic economics. It doesn't matter what the financing side of things looks like. If there's not enough to go around and people can afford now to buy more, does that just drive the prices of all these houses up and then it makes it even less affordable for people that can’t buy today? I don't know if it solves the problem. It sounds good, but it seems like lipstick on a pig sort of a thing.

Bridget: Yeah. I talked to a realtor this week who was talking about the low inventory and how they haven't been building enough in Chicago. And I remember almost going back 10 years talking to someone who works in the railroad industry. And they were talking about how they weren't shipping lumber.

And so, this problem goes way back. It's like the post-2008 recession problem, because people stopped buying houses due to the fact that a lot of people were underwater. There was a lot of things that needed to be worked out in the housing industry. And so, all that lack of building has now really come back to haunt us.

John: Yeah, people stop buying and then builders stop building. And it just hasn't ever caught up on the other side. Like a lot of issues in the financial world. it sounds like a good idea to do one thing, but you got to look at those underlying causes. And the other thing too is that you have to look at the cause and effect. Here's an idea that comes out. I don't know, maybe it's reasonable to consider, “Hey, let's look at this.”

But the idea that we're going to go and push something out without looking at all the potential signs and all different facets as we've just talked here in a few minutes can be problematic. Hey, there are some potential upsides not only from an affordability standpoint even. This makes sense financially speaking. It gives us even better longer-term protection against inflation. It gives us leverage over the bank. And if interest rates drop, we can refinance rates; we can go lower on that.

Bridget: Better inflation protection.

John: So there's a lot of good things, and there's also these other things. You go, “Oh wait, if I move every 10 years, am I reaping the benefits, am I paying down as much of the mortgage? And we didn't even talk about how if we're going to have a longer mortgage term, we’re probably paying a little bit higher interest and a lot more interest over time.

Bridget: A lot more interest over time.

John: And so, it's got potential, but I'm certainly not excited about it right now, and I think there's a lot more potential downsides than there are potential upsides.

Bridget: Yeah. And the other thing is that I think that it's going to be a while before anything could happen, because there's a debate about whether they need to repeal a particular law or if the regulators can just do it by FIA. And in those situations that tends to mean they got to go to court.

John: Yeah.

Bridget: Unless the legislators want to act. So that'll be interesting too, but again, so it doesn't sound like it's going to happen anytime soon.

John: Yeah. But it'll be interesting to watch. We would love to hear what you think about these things. Jot a comment in the comment box. Let us know what your thoughts are on a 50-year mortgage. Would you buy one? What are the caveats? How are you feeling about this? I'd love to have some interaction on that. And with that, that's a great place to wrap things up. I'm John Scherer, I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking new clients. You can reach out to us if you're interested. If you are living in a different part of the country besides Chicago or Middleton, and you're looking for an advisor in your area, you can check out acplanners.org. That's an organization with a lot of people in it that think like we do.

John: And help other people find us on YouTube. Hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation.  We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.