By David Koch, CFP®, AIF®, CFA, Director of Portfolio Management/Senior Wealth Advisor
Why the 50-year Mortgage is in the News
The Trump Administration and Federal Housing Finance Agency (FHFA) Director Bill Pulte have floated the idea of a 50-year mortgage as part of a broader affordability strategy. They’ve called it a “game changer,” but details remain sparse.
Current U.S. law, specifically the Dodd-Frank Act, requires “qualified mortgages” to meet specific criteria, including a fixed interest rate, being a first lien, no prepayment penalties, and a capped term of 30 years. Introducing a 50-year term would require legislative changes.
Importantly, mortgages must be “qualified” in order to be included in a mortgage-backed security pool (MBS) backed by the Federal National Mortgage Association (FNMA), also known as “Fannie Mae,” or the Federal Home Loan Mortgage Corporation (FHLMC), also known as “Freddie Mac.” These types of loans are called “agency backed” because there is an implied guarantee from Freddie and Fannie.
This is an important market. In 2025, the mortgage-backed securities market (MBS) is expected to reach USD 15.55 trillion, and agency backed loans make up about two-thirds of that, or nearly $10 trillion. If mortgages are not qualified, they cannot be agency backed, and lenders will either likely require much higher rates, or they may stop lending altogether.
History of Mortgage Rates and Positive Impacts of Government Intervention
Before the 1930s, mortgages were typically short-term (5–10 years), interest-only loans with balloon payments due at the end. Loan-to-value ratios were low (often requiring 50% down), and refinancing was frequent and risky.
In 1933, the Homeowners’ Loan Corporation (HOLC) was created to rescue distressed homeowners during The Great Depression. It introduced the fixed-rate, fully amortized mortgage, converting over a million short-term loans into 15-year amortized loans.
The Federal Housing Administration (FHA) later adopted and expanded this model. In 1948, it extended the term to 30 years, making the 30-year fixed-rate mortgage the standard in American housing finance.
The 30-year mortgage helped transform America from a nation of renters to one of homeowners. Homeownership rates rose from 43.6% in 1940 to 64% by 1980. It became a cornerstone of the American Dream, aiming to provide predictable payments and long-term affordability. I believe that by creating a global demand for US mortgages, the mortgage-backed security (MBS) is a cornerstone in keeping long-term mortgage rates lower than they would be otherwise. The Great Financial Crisis was an abomination of letting the foxes in the hen house, but in my opinion the creation of the MBS has been a huge benefit to home buyers in the US.
So, is the 50-Year Mortgage a Good Idea? The Good, the Bad, and the Ugly…
Recent headlines have been largely negative on the idea, illustrating that the amount that a borrower would pay in interest over the course of a 50-year mortgage would be considerably more than a 30-year mortgage. This is true, but it isn’t all bad.
A 50-year mortgage could potentially lower your monthly payment – good
The good. The first attraction is lowering the monthly payment. The most common rule of thumb for mortgage debt ratios is the 28/36 rule, which suggests that your total monthly housing costs (including mortgage, property taxes, and insurance) should not exceed 28% of your gross monthly income, and your total monthly debt payments (including housing, but also car loans, for example) should not be more than 36% of your gross monthly income.
If lowering the monthly payment allows someone to be able to borrow what they need to buy “the perfect place” that they couldn’t otherwise have been able to with a 30-year, so be it. As long as borrowers are aware of the pitfalls, they can make the best choice for them and their personal situation.
Ability to refinance your mortgage – good
Furthermore, as long as there are no prepayment penalties, they have the option to refinance into a shorter-term mortgage. Maybe they start with a 50-year and refinance into a 30-year after they start to earn more later.
Overall cost of interest on 50-year mortgages – bad
Let’s look at some more numbers. Borrowing $500,000 at 5.5% on a 30-year mortgage would put the monthly payment around $2,839, and the buyer would pay about $522,000 in interest over the term of the loan. They would pay a little more than twice as much as they borrowed over the course of the 30-year mortgage.
Over the course of a 50-year mortgage, the borrower would pay almost $970,000 in interest, almost double what they borrowed in interest alone. The monthly payment would be around $2,449, saving them about $390 per month, but costing them almost $448,000 more in interest than a 30-year mortgage.
Inflation – good
One factor I haven’t heard many people talk about, however, is inflation. If inflation averages 2.3%, the buying power of your last mortgage payment on a 30-year mortgage “cost” you half as much as your first payment (I backed into 2.3% because that makes it exactly half). To clarify, at 2.3% inflation, something that you can buy today that costs $10, you would expect to cost $20 30 years from now.
With long-term debt, inflation is generally considered to be your friend. Using the 2.3% inflation example, with a 50-year loan, your last payment costs you about 31% of what your first payment did in today’s dollars, because that $10 item today would cost about $30 50 years from now.
Adding to this factor is that the more inflation there is, the greater likelihood that your home price will rise as well (not always, but likely).
Principal payoff on 30 vs 50-year mortgages – ugly
Traditional 30-year mortgages are “self-amortizing,” meaning that each payment has a portion that goes towards the interest and a portion that goes towards principal, but it isn’t the same each month. The payments are set so that at the beginning of your mortgage, a higher percentage of your payment goes towards interest (only about 1.5% of your payment goes towards principal in the first year), and towards the end, you’re paying more towards the principal (98% towards principal).
What this means is that, for example, 15 years into a 30-year mortgage, you’re not 50% paid off; you’re only about 30% paid off. Assuming that 50-year mortgages are the same (and I don’t see any reason why they wouldn’t be), this can get exacerbated. 15 years into a 50-year mortgage, you’ve only paid down about 9% of the principal, and 25 years later, you’ve only paid down about 20%.
The Bottom Line: 30 vs 50-year Mortgages
The 50-year mortgage isn’t the worst possible idea, but it is probably a poor choice for most people. Like interest-only mortgages, it has a place in the mortgage product landscape, but only for very specific situations. The first borrowers who come to mind are people in medical or law school who have their eyes on a specific house but whose earnings haven’t reached the level they’re likely to hit in a few years. Then again, interest-only mortgages already exist to help meet that need.
Someone could also enter into a 50-year mortgage, and then when they see fit, they can do the math and start paying it down as if it were a 30-year mortgage. That’s literally how I got these numbers, I put them into a spreadsheet. As long as the law continues to allow no prepayment penalties, additional payments go straight towards principal.
My fear is that people will disregard the numbers, and similar to only paying the minimum payment on a credit card, will actually stick with that lower monthly payment for the full 50 years. That’s a bad outcome. If you’re considering purchasing a house and need help understanding your financing options, reach out today.
Sources:
Financial History Issue 113 (Spring 2015) | Page 25
https://www.mordorintelligence.com/industry-reports/mortgaged-backed-securities-market
https://capitalmarkets.fanniemae.com/media/4271/display
Trump proposes 50-year mortgage to help affordability
Here’s what Donald Trump’s 50-year mortgage idea could mean for homebuyers
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