Amortized Slaves: 50-Year Mortgages

Over the weekend, Donald Trump introduced the idea of 50-year mortgages in the United States. In his Truth Social post, Trump compared himself to the “great” American President FDR (setting that aside for now) who had first introduced the 30-year mortgage.

Trump has seen a lot of backlash about the economy this year (especially affordability), and despite his attempts to convince the American people that they aren’t struggling, this 50-year mortgage is an attempt to appeal to first time homebuyers who cannot afford to buy homes.

Initially, some are praising the idea. For example, OpenDoor’s CEO Kaz Najatian believes the “50 year mortgage is probably the most pro-homeowner government policy of the last two decades.” Some claim this will increase affordability through lower monthly payments, which could allow people to invest the rest. Others believe that in our inflationary world, longer-term debt (which will be devalued) is even better than what we have today. Some are even shouting that this is a “free market,” so you shouldn’t have a bad opinion on longer-term mortgages because you don’t have to get one if you don’t want one.

At best, these views miss the big picture, and at worst, they’re completely wrong. I’ll explain.

Interest Rates

One obvious reason this won’t make housing much more affordable for younger Americans is the interest rate. The longer term the loan, the higher the interest rate. This has always been true when comparing 15 to 30-year mortgages.

Let’s look at a 6% $300,000 30-year mortgage. The total monthly payment today would be $1,798.65. Is a lender going to give you a loan at 6% for extending this loan another 20 years? Probably not. There’s a LOT that can go wrong in a 50-year period. For instance, will a 40 year old even live long enough to pay off a 50-year mortgage?!

What’s that rate going to be? If it’s 6.5%, your monthly payment is going to be about $100 cheaper. I’ll say that all else being equal, that $1,200 per year isn’t going to completely change the affordability issue for people in this country, although it might help some. However, if the interest rate is 7%, you’ll actually be paying a HIGHER monthly payment.

We simply don’t know what the interest rates will be yet, and therefore, we cannot automatically assume this will make housing more affordable.

Inflation & Down Payments

Ben Carlson from A Wealth of Common Sense had an interesting take suggesting we give any non-homeowner under 40 a one-time 3% mortgage. Well, common sense tells me that there are around 50 million people between 18-40 who don’t own a home. If you impute a $200k mortgage for each, that’s $10 TRILLION of additional mortgage debt. Where is the money coming from?!

The answer is that in our fractional reserve banking system, loans ARE inflation. It’s money printed out of thin air. This policy suggestion is not realistic, but it hits on the main point. The inflationary debt is responsible for driving higher prices. We do not have a shortage of homes. We have a shortage of affordable homes. An increase in loans is going to artificially boost demand the same way it did leading up to the housing crisis.

Furthermore, interest rates aren’t the biggest issue with housing. Rates are near historical norms. The biggest issue, by far, is coming up with a down payment on a house that’s doubled or tripled in value over the past 10-15 years. Inflation is the underlying issue, and as a byproduct, feeds into interest rates. If inflation is going to be 7%, banks are losing money by lending at 3%. They’ll have to lend at a much higher rate.

With trillions of new dollars flooding into the housing market, how can we expect either prices or rates to drop? It’s a pipedream.

Government Guarantees

As far as the “free markets” claim goes, it’s true that you don’t have to apply for a 50-year mortgage if you don’t want one. However, it’s not true that this is a “free market,” and you won’t be impacted. Even when the U.S. was on the gold standard, we still had fractional reserve banking. This is effectively the idea that banks can print money to lend without sufficient or any underlying backing. There’s nothing inherently destabilizing with fractional reserve banking itself. However, when the Federal Reserve and government deem these banks “Too-Big-To-Fail,” backstop 70% of loans, and control a cartel on our money, we don’t have free markets or capitalism.

In this system, banks can legally counterfeit money. They can then lend that money to homeowners. And if homeowners don’t repay, they get bailed out by the government while people lose their homes. It’s also the people who must bear the burden for the inflation created by the banks, the subsequent rate hikes by the Fed, and the economic fallout. You’re impacted regardless of whether participate in getting a 50-year mortgage. If banks were allowed to fail, you’d see far less of this inflationary money printing.

And all this gets worse because right now Fannie and Freddie, who buy mortgages from banks and package them into MBS (mortgage backed securities), are under conservatorship. The U.S. government owns these companies. That means, if these mortgages Fannie and Freddie bought go bad, the U.S. Treasury (aka the taxpayer) is on the hook. And now Fannie and Freddie are removing their 620 minimum FICO score, encouraging even riskier loans.

Amortization

However, the biggest issue with this atrocious 50-year mortgage idea is loan amortization. Let’s use the $300,000 mortgage as an example again. Let’s just assume that you could get a 50-year mortgage at the same rate (6%) as a 30-year loan. Yes, it’s true that your monthly payment is going to be about $200 cheaper. What’s hidden beneath the carrot is the stick: the amortization schedule that silently crushes people.

Most people don’t hold their homes for 50 years. The average length is around 10-13 years. You take out a loan, make payments, sell your home, and apply your equity to your new house. And then the amortization schedule begins again. So, how does this work out in the long-run?

With a 30-year mortgage, 83% of your first year’s payments are going toward interest. Free money for the bank. Only 17% of that builds equity. However, it’s MUCH worse when you extend the loan term to 50 years. Only 5% of your first year’s payments go to principal! In those 10 years, you’ll make about $189k worth of payments, and you only get to keep about $13k. The bank keeps the other $176k.

On the 30-year amortization schedule, you’d pay a total of $347,514 in interest on your $300,000 mortgage. However, if you stretch that amortization schedule another 20 years, your interest cost almost doubles to $647,528… on a $300,000 mortgage. But again, remember that most people don’t fully pay off their mortgages. They sell their homes and start the amortization process all over again. In other words, they never get to the point to which even the majority of their payments are going to interest.

To counter this, some are saying that people can simply invest the savings from lower payments (~$200/month). Again, this is assuming the same interest rate, but it also ignores the reason why we’re here. If people truly can’t afford an $1,800 payment, how are they going to make a $1,600 payment and invest the rest?

But I’ll humor the argument. Even if you did invest $200 per month for 10 years, at 8% growth (pre-tax), you’re left with $35,199 in investments plus $12,980 in home equity = $48,179 net worth. Had you just gone with the 30-year mortgage, you’d have a higher net worth of $48,943. You’re risking your capital, and you’re still not getting ahead.

Amortized loans reduce risk for banks who are already backstopped by the Fed and government. It’s most pronounced on longer-term loans, but it applies to the majority of debt you’ll encounter. Monthly payments and interest rates can be highly misleading. These are toxic loan structures that enslave people in debt and should be avoided at all costs. The 50-year mortgage is an AWFUL idea.