In recent news stories, it is likely you’ve heard about the idea of a 50-year mortgage. The current administration has introduced this idea in an attempt to make owning a home more affordable. Yet, would a 50-year mortgage really make buying a home more affordable?
Fifty-year mortgages are not currently a reality because it would be unlawful for a financial institution to offer one as a qualified mortgage. The Dodd-Frank Act, which became law in 2010, created certain criteria for qualified mortgages under its Ability to Repay Rule. The reasoning was to curtail predatory lending practices.
A qualified mortgage is a home loan that meets specific government-regulated criteria. They are generally less risky than other options. Qualified mortgages generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. A private lender could offer a non-qualified mortgage with a 50-year term, but that loan could not be purchased and insured by Fannie Mae or Freddie Mac.
The Ability to Repay Rule was implemented because prior to the mortgage crisis of 2008, lenders were using loose underwriting rules to qualify borrowers for a mortgage, including failing to verify the consumer’s income or debts and offering consumers introductory teaser interest rates that could jump to unaffordable levels after the first few years.
These risky loans were insured and purchased by Fannie Mae and Freddie Mac, which ultimately became a huge problem, as we all remember. As part of the Dodd-Frank Act, qualified mortgages are presumed to be compliant under the Ability to Repay Rule. Fifty-year mortgages are not compliant because they may not be great for consumers.
If you took a $400,000 loan at 6.25% interest, over 30 years, the consumer would pay approximately $486,750 in interest. That’s already over 100% of the principal amount. Now, if we take that same loan amount and amortize it over 50 years, the total interest would be approximately $951,800. That’s almost double the amount of interest paid.
When comparing a 30-year term to a 50-year term for the same $400,000 loan, the consumer would save about $200 per monthly mortgage payment. However, saving $200 per month may not be worth the extra interest over the life of the loan.
There are also issues with generating equity over a 50-year term. The longer the term of the mortgage, the more overall interest the consumer pays, and the more those interest payments will be front-loaded. Therefore, with a longer term, it would take the owner a much longer time to generate any significant equity in the property.
Remember, current law does not permit qualified mortgages with a 50-year term. Right now, the idea of a 50-year qualified mortgage is just a suggestion.
If you have questions about 50-year mortgages, you can always contact us on the Virginia REALTORS® Legal Hotline.
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