"Consider someone taking out a $500,000 home loan. The current rate on a 30-year mortgage is 6.22%, per Freddie Mac. For these calculations, let's assume that a 50-year loan's interest rate exceeds the 30-year by the same margin that the 30-year rate exceeds a 15-year rate. That translates to a 6.94% rate on the 50-year loan - which would then have a monthly payment of $2,985, only $83 less than the 30-year mortgage."
"In the early decades of the loan's repayment, the 50-year borrower's payments would almost entirely go to interest, paying down the debt much more slowly. After five years, for example, the 30-year borrower would have paid off $33,481 of the loan balance, versus $6,707 for the 50-year borrower. After three decades, when the 30-year mortgage is fully paid off, the 50-year borrower would still owe about $387,000."
"One of the benefits of a traditional mortgage loan is that it incorporates forced saving, as you gradually grind down your debt. The 50-year loan lessens that benefit. A person who buys a house in their 30s stands to own it free and clear as they hit retirement age. Or if they sell sooner, they will have accumulated equity that they can use toward their next home. A 50-year product would more closely resemble an interest-only mortgage, where there is no amortization of the balance for some defined period, like the first five or seven years of the loan term."
A 50-year mortgage spreads repayment over a much longer term, causing minimal principal reduction during the early decades and much slower equity accumulation. Such a loan would likely carry a higher interest rate than common 30-year mortgages, limiting monthly-payment savings. For a $500,000 loan example, a 50-year rate modeled at 6.94% yields a $2,985 monthly payment, only $83 less than a 30-year payment at 6.22%. After five years the 50-year borrower has paid far less principal, and after 30 years would still owe roughly $387,000. The product resembles interest-only financing and reduces the forced-saving benefit of traditional mortgages.
Read at Axios
Unable to calculate read time
Collection
[
|
...
]