Let’s first turn to the obvious negatives. The Trump idea is an admission that he and pretty much everyone are unserious about addressing the housing unaffordability problem because too many powerful players benefit from it. The most obvious remedy is to build more middle/lower middle class residences in high cost areas. But right away, that runs hard into NIMBYism: all those well off with their tony houses don’t want the servant classes or even dull normals living nearby and possibly harming their property prices.
… the popular freely-refinancable (as in no prepayment penalty) 30 year fixed rate mortgage is a very unnatural product and is found in comparatively few advanced. economies. On paper, it puts the interest rate risk on the lender. If rates drop, borrowers refinance, taking the loan away from creditors just when taking the risk of longer-dated loans is paying off. There are many ways to better share the interest rate risk, such as barring refis for the first five to seven years of a mortgage, or having interest rates float subject to a floor and ceiling. I had that sort of product in the early 1980s and was very happy with it. You can pencil out what your worst-case mortgage costs might be and benefit with no expenditure of effort if interest rates fall.
So why is this supposedly borrower-favoring feature, of the “freely refinancable” fixed rate mortgage, actually not good for borrowers? Because that option is NOT free! Not only do borrowers pay fees when they refinanace, but lenders have succeeded in structuring refis so that roughly 2/3 of the economic benefit of the refi is captured by financiers, not by the homeowner.
A related bad feature of the refinancable 30 year mortgage is that it increases systemic risk. Mortgage guarantors Fannie and Freddie have to hedge the refi risk. That hedging is pro-cyclical on a systemically disrupting scale.
…
50 year mortgages, compared to a 30 year obligation have more of their payments over their life in interest. That means in a refi more total interest savings. That means even more in fee extraction by middlemen! More critically, it also means much greater pro-cyclical hedging action, and thus an even bigger increase in systemic risk, assuming that there actually was consumer receptivity to this bad idea…
Explain the 50 year mortgage in layman’s, I mean idiot term for me please.
It’s beyond bad, it’s outright dumb as fuck.
As it stands, a 30yr mortgage at current interest rates means that you end up paying ~$1.20 in interest for every $1 borrowed.
A 50yr mortgage at current interest rates would have you pay $2.50 in interest for every $1 borrowed.
You would end up literally paying 3.5x the value of the mortgage - it’s outright criminal.
I was reading up on it. Apparently a fannymae chairman came up with it and Trump went with it. What a fucking joke, a bank responsible for the last financial crisis is running the govt now.
Thanks for breaking it down. The articles were saying double the mortgage and it seemed unbelievable. I think you usually pay the interest first on a mortgage also.
A 50 year mortgage is just renting with extra steps and additional responsibility.
In a recent interview, Trump made it clear that he thought that the standard mortgage now is 40 years.
Yeah but I’ll pay $200 less a month! /s
Just think about how many extra streaming services I can pay for now!
Yeah and your $800/mo new car with leather seats gets 6 miles per gallon more than the paid off base model. ExxonMobile is practically paying you now!
For only 240 extra months!
As long as we can keep this ponzi scheme going it doesn’t matter you’ll make it back.
But 89% more in total.
While I fully agree this doesn’t solve any affordability concerns, for those with no affordability concerns that $200/month is better served in a portfolio, which will inevitably have a higher return than a secured interest rate. This does help, but it only helps people with no issues with affording a home in the first place, and can use the system to make further gains (albeit fairly minor).
Assuming a higher interest rate than a 30-year fixed and assuming a generous 10% return on your investments, that’s like $5 per month…
So it’s likely the middlemen corps that have told Trump to attempt to implement this, isn’t it?
The parasitic health-denial companies (jokingly called insurance companies) want to return to their previous business model of taking your premiums, then denying any kind of useful coverage.
Can confirm. I keep getting charged exorbitant amounts for the terrible crime of daring to go to the doctor because I had a constant headache for a month straight. Fuck UHC and fuck all health insurance companies. Same shit, just different flavors.
Soooo… is 100-year fixed rate out of the question? Asking for a (very young) friend
You’re joking, but the reverse of that is essentially how early retirement works. Finding a 30-year retirement costs almost the same as an infinite retirement, due to the effects of compound interest. So, if you can increase your income while keeping your spending low, you can afford to retire very early and live off investment income forever.
Working on this now. Not sure if I’ll make early retirement, but I plan to have my house paid off inside the next 2-3 years. I’m in my early 40s, and the house is my last debt. Everything else is paid off other than monthly revolving spend. And the house is a new build, was constructed in 2021, so shouldn’t have any major issues for quite some years. Also have a fully paid off solar and battery setup to keep electric costs low (I pretty much just pay the grid tie connection fee monthly, no usage billing).
Hoping I’ll be able to retire by 55 since I’m tired of the grind, but if it doesn’t happen, it won’t be the end of the world.
And the house is a new build, was constructed in 2021, so shouldn’t have any major issues
Where I live, the opposite is true. Buying a new-build is like buying a Tesla: expect to spend the first few years fixing quality problems, with a residual risk that some can’t be fixed at all. And look at the neighborhood closely: it’s not unusual for new-bulid property to be far from useful infrastructure and services. In my Victorian neighborhood, there are shops, cafes, pubs, good schools, medical clinics. In far-flung new-build land, you might have to drive into my neighborhood to access any of those. And don’t bother taking the bus, because there are probably no bus routes either.
And all of the appliances and fixtures are “builder grade” which means they last 10 years and 1 week. Dripping faucets, fiddley light switches, stuck heat pump reversing valves, leaking water heaters.
It’s not like a new car where teething problems are resolved in the first year. You won’t know that your foundation is going to settle for several years, or that the vent boots on the roof leak a little bit until the sheathing rots enough for the drips to hit sheetrock.
And so the gap between the classes widens again. 1.2m in interest on a 420k asset, paid over your entire adult life. Imagine being stuck paying >2000$/month for life to a bank, BUT with the additional costs of maintenance & probably an HOA & rising property taxes. At that point, renting is the only option, but the prices of that will rise too. So GG capitalism, it’s time to tape leaves to a tent and live in the middle of a roundabout with your 4 cats and a handgun
4 cats? In this economy?
I have 2 cats that both need prescription food or else they get UTIs and urinary crystals and I’m not exaggerating when I say that I spend more monthly on their food than mine. Last week I was putting on my boots getting ready to go off to work another 16 hr OT shift and they were both sitting at my feet crying and I was like hey this is your fault you two are expensive I would prefer to be playing video games right now.
They feed themselves so it’s great companionship!
I’m not sure why this is a better argument against a 50 year mortgage than against 15 or 30 year mortgages. The author does say that 50 years gives more opportunities to refinance, but many people who buy homes don’t intend to live there 50, 30, or even 15 years. For these people, the only thing that matters is the monthly payment and the choice of a lower payment but with more of that payment going towards interest can be a rational one.
Differences in degree are still differences. Longer is worse.
I think maybe you misunderstand how selling a home with a mortgage works? To be fair, it’s possible I don’t fully understand as well, but as my understanding goes…
The buyer doesn’t just assume ownership of the loan, and start making the same payments as you.° They have to get approved for their own mortgage for the sale price of the house (or buy it outright), and then you use that money to pay off your mortgage’s remaining principle.
So, if you have a $400,000 house where you’ve only paid $50,000 towards the principal over 10 years, out of a 50-year mortgage, and you want to sell it, The buyer pays you $400,000, then you use that to pay the remaining $350,000 of principal, leaving you with $50,000 to go buy a new house. Likely you’ll need another mortgage of your own, but you can probably use that $50,000 as a downpayment, to knock down the monthly, or take a shorter term.
So, that’s 10 years of mortgage payments, totaling say $250,000, and you only have $50,000 worth of value to show for it. Contrast that with a 15 or 30 year term, and you’d be getting a MUCH larger chunk of your payments back in value.
Having a mortgage isn’t the same as renting (it’s starting to get pretty comparable with this 50-year shit, though), you are actually building value for yourself as you make payments, no matter how long you live there.
° Technically, Mortgage Assumptions are a thing, but they’re EXTREMELY rare. It has to be an option written into the mortgage agreement, from the beginning. In the US, it basically only exists for military personnel and veterans, as a perk that the government mandated to make it easier for military families to move across the country at a moment’s notice. Also, it’s really just about keeping the interest rate, the buyer still has to come to an agreement with the seller to buy out their accumulated value.
The issue isn’t about ownership, per se. It’s about acquisition of principle value which you carry with you when you sell the house.
The example halfway down the post of a $400K loan fixed at 6% is a good example: A 15-year loan would have a $3,375.74 monthly payment but pay off $305,364 principle after 12 years. A 30-year would have a $2,398.20 monthly payment, but have only $134,978 paid off. A 50-year has a $2,063.74 payment only pays off $66,251 principle.
This is why it’s a particularly bad debt trap. The 15 or 30-year mortgage allows the homeowner to move and have acquired significant principle value, which makes the costs of moving much lower.
And the monthly payment in substance are costlier when you add “interest” (rent into a black hole) and lower “principle” (long-term loan to the bank which is repaid back at sale). When the house is sold, the principle value returns to the seller via the sale and remaining loan payoff. So when you are paying off, say, $1,000 a month, if $600 is principle and $400 is interest, your true (final, after-the-sale-returns-principle-to-you) payment is $400. If you lower the total to $900 a month, but it breaks down as $400 principle and $500 interest, the true payment is $500.
So again, debt trap.
gah. the thought of not planning on living somewhere for even 15 years. Yup I have never lived anywhere for 15 years but I sure do want to. I hate moving. I always intend to live forever at a place but stupid life.
With an interest rate of 6.5% you have a doubling time of roughly 10 years. So over 50 years it’s a huge difference.
If the regressive dumbasses in this country don’t succeed in their (apparent) project of completely ruining science and medicine in this country, I would not be surprised to see the average lifespan/healthspan go up.
Even so, I still think 50 year mortgages are rather stupid. But with dipshits running things, it would not be surprising to see the combination of the worst kind of outcomes even in the face of breakthroughs in age extension/reversal - people still being forced into retirement early, but coming up with schemes like 50 year mortgages at the same time…barf.
Financial slavery is just another name for slavery.
No one in the us ever looks at how things work in other countries, right?
While we don’t have the exact same mortgages setup in the EU, it’s not in any way uncommon for our house loans to not be realistically paid down during one’s life time. Yeah, we indeed refer to it as renting from the banks.
I looked it up and France is 20 as the most common with generally up to 25. Spain is 20 average with 25-30 and max of 40. Italy, Germany and even the UK are in that range with UK being the longest now with 31-32 capping out at 40 generally. 50 is not normal for comparable countries. Are you suggesting that in your country 50 is normal?
Sherrif eviction.
