Need a Lower Payment? Why the 50-Year Mortgage Is the Worst Way to Get One

In this episode of the Less House More Moola podcast, Laura explores the concept of a 50-year mortgage, discussing its implications for homebuyers and the mortgage industry. She highlights the changing demographics of homeownership, the financial calculations behind different mortgage terms, and the impact of amortization on equity. The conversation emphasizes the importance of understanding the long-term financial commitments associated with mortgages and encourages critical thinking about loan products.

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Transcript

Less House More Moola Podcast (00:00)
Hey everybody, Laura here. Welcome to Less House More Moola podcast. Thanks for joining me today. I thought that we would talk about the 50 year mortgage that's recently been floated as an idea. Maybe you've heard about it. The idea being here that if

extend the payment timeframe on a house,

that it reduces the payment amount every month, making it more reasonable in terms of people's income and their percentage of their income that they spend on their housing.

So I want to really explore this concept from the position of the buyer. And yet I also think it's really informative to think about it from the industry or business perspective. We have all seen the headlines. We know that mortgages

and the mortgage industry have been struggling over recent years with higher interest rates, with the first time homebuyers sitting out of the market, with folks not selling their homes and creating more inventory because they have locked in a lower mortgage rate in the past than what's currently available.

So recently it has come to light that the average homebuyers age is 40 years old. Definitely we're seeing some delay in achieving that sort of baseline economic entry point of getting into your first home. And what that means is that people are taking on a first mortgage later and later in life. Now we know

that the standard mortgage that many people end up in is a 30 year mortgage. So if the first time that you get into a home and if you stay in that home for the entirety of the loan term and you don't refinance or upsize or downsize or move or accelerate your payment schedule, that means that you're 70 years old.

when you finally reach actually complete home ownership. So the idea of having 50 years of paying off the roof over your head means that in that situation where you don't downsize or upsize or refinance or ⁓ accelerate your payment schedule,

then in that case, you are 90 years old if you're a first time home buyer at 40. Now in practical terms, we all sort of understand that most people don't buy their first home and then spend 30 years in the same place and pay it off and then live happily ever after. That's not actually how life works.

And so most people will buy a first home and either move or upsize or find a job elsewhere or accelerate their payment schedule or, you know, life has a lot of changes. And especially in our current environment where people's jobs are changing or uncertain or what have you, we certainly know that.

folks are not going to have that smooth path. So there's sort of the expediency or the short term gain of the idea of having a lower payment amount on a home. So taking a 50 year mortgage instead of a 30 year mortgage and reducing the payment amount. If you know for a fact, you're not going to be in that home forever anyway. So what the heck does it matter?

Well, it does actually matter. It matters even when we compare a 30 with a 15 year mortgage in terms of the total amount of interest that you're ultimately paying or that you're paying even for a short period of time, as well as how much home equity you're able to build in that, say five years that you're in that home. So a lot of things behind the scenes in the mortgage calculation.

that are definitely worth looking at if this is a serious consideration. Now for folks listening to Less House, More Moola podcast, I'm pretty sure that we're all on the same page that longer debt is not better debt and that larger debt is not better debt and that paying more interest is not what we're aiming for here. But perhaps you know someone who is considering

⁓ extending the term of any loan, whether it's a home loan or a car loan in order to get that lower payment. And gosh, we've got to give them some grace, right? Because it's really tough to find an affordable roof over your head. And yet at the same time, it's good to know all of the implications of our major financial decisions and how they actually will impact other areas of our life.

So for the sake of calculation, I have in front of me just two calculations. One is the average home when we look at it over 30 years at 6 % interest rate. And the other is a average home when we look at it over

a 50 year term at a 6 % interest rate. Again, just comparing the same exact home purchase at the same exact interest over 30 years versus over 50 years. And so you can do this calculation. It's very easy. You go to mortgagecalculator.org. I have no affiliation with this site, just a simple calculator that doesn't try to sell you a lot of stuff, which is what most other sites do. So mortgagecalculator.org.

You can put in the home value or purchase price. You can put in the down payment amount. that subtracts down to the loan amount. You put in an interest rate, you put in a term. And then you have the option of adding in things like property tax, PMI, home insurance, HOA, all those things. In this case, I've zeroed all those things out. I just really want to understand what the principle and interest is.

I've talked about these calculations a good bit before on the home equity episode that I did a while back, but just for our numbers perspective, if you were to buy the average home price, right, which is sitting at around 430,000.

This is typical for a average across the United States. Of course, we understand that in certain areas, there is no way you're buying a house for $430,000 and in other places, you could buy a lot of house for $430,000. just taking this target number, you can do this calculation for yourself on different home purchase prices. But anyway, over 30 years.

$430,000. If we look at that at 6 % interest, the monthly payment only on principal and interest does not include home insurance, taxes, HOAs, PMI, all the things, just the principal and interest that's being paid is $2,578 a month. Now,

This is important from an affordability perspective, and we're going to talk about this a little bit more later, but what is really important about this is the total interest that we are paying over 30 years. So over 30 years on that $430,000 home at 6 % interest, we are going to pay $498,000. So interest more than the actual purchase price.

$498,000 spent just to borrow somebody's money. $498,000 that is not being saved in your retirement accounts or your emergency fund or used to put food on the table. $498,000 to the mortgage banker who's letting you use their money for 30 years. So the total of payments over that

30 year timeframe is $928,000. So actually the home that you thought you were buying for $430,000 once you get done paying for it over 30 years, you have spent $928,000. And as I've talked about on that home equity episode and other places, if you think about the big picture of how much money flows through your household in the course of a working life, then you can total up.

Say you get a salary at $40,000 a year, you're going to work for 40 years. You do that math. And then you think about how much you have spent on your home as a percentage of that total income. And that can be really shocking to think that that's just one important, but just one part of our life. So again, total spent on the $430,000 house over 30 years, 928,000.

Now let's flip on over and we can run this calculation as I have just done on a 50 year. So if you were able to extend that timeframe by another 20 years and say, I've got now 50 years to pay on this house and yay, I'm going to get a lower payment because month to month, I can't afford that larger payment that we talked about a minute ago of 2578. So if you extend that

purchase over 50 years, then the payment is $2,263. So, you know, about $300 less a month. Again, not counting taxes and insurance, maintenance, HOA, PMI, all the extra things that come along with $300 fewer a month as a payment. What's interesting though, is the total amount spent on interest.

goes up a lot. it almost doubles. So where you purchased a $430,000 typical, let's call it a starter home. Then what we see is that over that 50 years, you spend $928,000 in interest. Again, interest does not go into your home equity. It does not go into your savings account. It is literally just money you're paying someone to make use of their capital.

So $928,000 in interest. So the total amount spent on that home over the 50 year payment period is $1.3 million. So triple the purchase price. So I think this is really interesting to understand because when we think about it in the long term, it seems like yes, I'm lowering my monthly payment. Maybe that means I can save a little extra.

But ultimately what's happening is that people who are choosing this are choosing it from an affordability perspective. They probably aren't choosing it to be able to save extra because in the long run, they're spending a whole whole lot more for their home in the big long-term picture.

Another key point to think about is if you've ever had a mortgage before or any kind of loan that uses an amortization schedule, you will probably have noticed that in the early years, you're really only paying on the interest and very little on the principal. And the closer you get towards the end of the timeframe, you are paying down the principal balance.

So what this means from a equity standpoint is that in the early years, you're just paying those borrowing costs, those costs of borrowing someone's money and that you really are doing very little to increase the equity that you have in your home because you're not really paying down the principal balance.

So when you go to sell your home and you get that payoff amount and you notice that that payoff amount is not that much lower than the original purchase price, that reflects the fact that really what's been happening is that you have been paying a lot on those borrowing costs instead of paying down the principal balance on the home. And so when we look at a 50 year amortization schedule, we can see that in

the first year of that amortization schedule or the schedule of that mortgage, only $1400 of principal is actually paid down, even though over $26,000 is paid every year on the home. The first year is 1400, the second year is 1500, the third year is 1600.

It is very small amounts that are used to pay on the principal and mostly what is just being paid for is the borrowing costs or the interest on that home. So in that situation, if you do plan to live in the home only for four or five years and then sell it and then move on to another place or another home or what have you.

There's just not a lot to gain from a what you've paid off perspective in the first four or five years. And really it's not until you get way further down the line and the loan that that equity starts to build up within the home itself. Now, of course, market forces, what's going on in the real estate market might have increased your home equity significantly, or your house could be underwater.

that it too is a possibility that we sometimes forget that happens. But for sure, the housing market can go up and it can go down depending on what's going on in the economy and the labor market and the housing market. We've got multiple forces here. We've got a shortage of housing, but we're also seeing increased unemployment. So those two forces may have differing impacts on the housing market around the country.

And so if at the end of five years, you've only paid off say eight or $9,000 of your total principal balance, that doesn't give you a lot of gain when you go to sell that house. And then you subtract from that the selling costs, the costs of originating another loan, And what you might find is that you actually lose money in that timeframe.

So this is why there's kind of a rule of thumb around staying in a home for five years or more when you use a 50 year mortgage that probably should be expanded and say don't plan to sell your home until you're in it for say 10 years or more because you're not building that equity in a short period of time.

So that's the math, $300 of monthly savings, but double the amount of interest that gets paid over the life of the loan. The house goes from costing you double what the purchase price was in a 30 year mortgage to triple in a 50 year mortgage. So really our optimal situation would be to spend less, to finance less, and obviously to

devote less of our human capital, our time, our attention, our energy to the roof over our head. Of course, having a small home, living tiny or doing a DIY build or living in some sort of alternative housing or co-housing. It's not for everybody, but it's just really good to think about the full implications. And sometimes when we hear things

bantered about in the media. We don't fully understand all of the backdrop there. So I wanted to break that down. Now, this is from the purchaser perspective. And certainly there are going to be times when we don't make the optimal financial decision because we're just literally trying to stay afloat and keep our head above water and having a roof over our head, matter how we have to make it happen.

Sometimes it's just something that we have to do and we have to compromise and work within the rules and the systems that exist. The systems are dysfunctional, shall we say. Life is really challenging and everything is a lot harder than it appears on the surface. And so no shame to anybody who has a 30 year mortgage.

or makes compromises in financial decisions in order to put a roof over their head. I certainly have had my share of 30 year mortgages in the past. And really it was that realization that, I'm 41 years old and I have 30 more years to pay off this home because I refinanced it again.

And so now I'm going to be under this house. I'm paying this off for 30 years. And that means that my career has to stay stable, that my income has to stay stable, that I can't take any extended time off, that I can't focus on what is really important to me. I just have to be in the grind is what prompted our move to our tiny house. So a 30 year mortgage can also be a high motivator when it comes to making that transition.

to something else like tiny or alternative living.

I would be remiss though if I don't call out who makes out in the 50 year mortgage scenario. So just imagine the mortgage bankers, they're having not the best year. They had not the best year for a couple of years due to the fact that mortgage applications are down. People are not buying as many homes. People are not rushing out right now to spend, 400 or

500 or 600 or $700,000 at 6 % or higher interest rates. People are really holding off hoping that they're going to get a better deal in the future. And so those guys or gals that are sitting around behind the scenes are like, Hey, what if we extended the payment period timeframe to make it a little bit longer so people have longer to pay off their home?

that would make it so that they would have a lower payment. So it'd be more affordable perhaps for current incomes that exist. And hey, by the way, we're going to make twice as much interest over a 50 year loan as we would over a 30 year loan. So therefore lots more opportunity for corporate profits here. Yes, there is always somebody making money in

in the deals that come in front of us. Think about the car loans, right? Recently, car loans have gotten extended. Current car prices have gotten, much higher than anyone anticipated. Average car purchase right now, I think, is at $50,000. And so now we have longer and longer loan terms available on cars. So people are driving around in cars that are out of warranty,

and now they're still paying on them too. So critical thinking when it comes to loan products is, you know, it's a rabbit hole. You can go down into, but I want to just say for anybody who has not yet dove in to the details of ⁓ how much it really costs.

when we finance anything, I think it's worth doing those calculations and understanding the commitment of yourself that you're making to these physical, tangible things that we certainly need. We need cars, we need roofs over our head, but is there another way? Is there another way that would be more in alignment with you having some financial freedom?

some savings in the bank and not being so stressed and trading your mental well being for the thing that you think you want.

So thanks so much to the media for giving us this topic that we could dive into and really think critically again about loan products, about mortgages. If you haven't checked out my home equity episode, make sure you go and check that out because I think that was a very worthwhile discussion. I have certainly benefited from home equity.

But as I've said probably before, I feel like more of it was sweat equity than market equity. So it was a lot about time and effort and sacrifice that was put in to make those properties more valuable over time.

I of course, I'm here to help you sort through all of these details and consider all of your options and figure out what is truest for you. You can check out the thetinyhouseadviser.com If you want to know more about working with me, thanks for diving into this topic and we will see you next time.