In another attempt to make home buying more affordable, President Donald Trump floated the idea of a 50-year mortgage in a social media post. In response, Bill Pruitt, head of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, posted that he was “working on it” and that it would be a “complete transformation.”
The purpose of a long-term mortgage is to reduce the homeowner’s monthly payments. The longer the term of your loan, the less principal you will need each month to repay it in full. But such plans also have other tradeoffs.
Using the latest median home sales price of $415,200 in September, according to the National Association of Realtors, and current interest rates of about 6.3%, according to Mortgage News Daily, a 30-year fixed loan with a 20% down payment would result in a monthly payment of $2,056 in principal and interest alone. If you extend the term to 50 years at the same interest rate, your payments would be $1,823, a savings of $233 per month.
But homeowners won’t be able to build equity as quickly because their principal payments will be lower. The amount of interest paid to the lender will be 40% higher.
how it works
The real question is, can Fannie and Freddie do this? Analysts say that’s a possibility, but 50-year mortgages currently do not meet the definition of a qualified mortgage under the Dodd-Frank Act, which provides investors with Fannie and Freddie backup if the loan defaults. But regulators were given the power to change it to ensure mortgage affordability. But that could take up to a year, given the need for Congressional approval, said Jarrett Seiberg, financial services and housing policy analyst at TD Cowen.
“Fannie and Freddie could establish a secondary market for 50-year mortgages in advance of the policy change. They could also purchase mortgages for their portfolios. However, this does not change the lender’s legal liability. That is why we believe lenders will not originate 50-year mortgages without a QM (qualified mortgage) policy change,” Syberg wrote in a note to clients.
How does it affect interest rates?
Next is the issue of mortgage interest rates. The average interest rate on a 15-year fixed mortgage is currently 66 basis points lower than the rate on a 30-year fixed mortgage, according to the Mortgage Bankers Association. This means that a 50-year fixed rate will be higher. It all depends on investor demand for the product.
“Currently, there is no secondary market for these loans, and it is unlikely there will be a strong secondary market in the near future,” said Matthew Graham, chief operating officer of Mortgage News Daily. “This means that in addition to the very low principal paid at the beginning of the loan, the interest rate is also significantly higher than a 30-year loan, which is a double whammy for those looking to build equity.”
Mr Graham said that for practical purposes, the loan would be more like an interest-only loan because few people would keep their home for 50 years. Homeowners can still gain equity through rising home prices, but home prices have fallen rapidly across the country this year, far from the gains seen in previous years.
Impact on affordability
Real estate agents agree that the savings for homeowners will be minimal.
“This is not the best way to solve housing affordability. The administration would be better off reversing the tariff-induced inflation that is keeping existing mortgage rates high,” Joel Varner, senior economist at Realtor.com, said in a release.
Some say the new mortgage product will likely depend on Fannie Mae and Freddie Mac remaining in government conservatorship. The Trump administration has said it will take both companies private and hold initial public offerings in the near future.
“The adoption of a 50-year mortgage product could complicate the path to privatization for Fannie Mae and Freddie Mac,” Evercore ISI analysts said in a note to clients. “That said, we understand that the administration expects the GSEs to remain under conservatorship after selling approximately 5% of their shares to the public. This will allow the administration to maintain control of the GSEs for some time.”
Housing affordability is a major pressure on the Trump administration. Historically low interest rates due to pandemic-driven economic policies have created historic demand for housing, driving home prices up more than 50% in just five years. As a result, home sales declined dramatically, as did mortgage demand.
The average age of the typical first-time buyer was 28 in 1991, according to a report by the National Association of Realtors, which will reach 38 by 2024, a number the association’s deputy chief economist called “shocking.”
The Trump administration is pressuring builders to build more homes to ease prices, saying there is an oversupply of vacant land. Builders claim and continue to claim that land, labor and material costs are high.
In the company’s latest financial report, pluto group CEO Ryan Marshall said he agreed with the president’s view of the nearly 4 million undersupply of homes for sale, adding, “While this undersupply certainly has an impact on general affordability, the complexity of the new homebuilding industry means that addressing a problem of this scale requires a coordinated, comprehensive approach that involves federal, state, and local leaders working collaboratively with the new homebuilding industry.”
