Rockefeller Center’s Christmas tree is here for the holiday season
The iconic Rockefeller Center Christmas tree has arrived in New York City in preparation for the holiday season.
President Donald Trump appeared to propose a 50-year mortgage on Saturday, Nov. 9, an idea that drew criticism from Washington leaders, researchers and others.
“Thanks to President Trump, we are on the verge of a complete game changer: the 50-year mortgage,” Federal Housing Finance Agency Director Bill Pruitt wrote in X.
But other Trump supporters balked at the idea. Conservative MP Marjorie Taylor Greene shared her opposition to the move on X, arguing it would “reward banks, mortgage lenders and home builders while people pay far more in interest over time and die before paying off their homes.”
While the idea of extending the term of your mortgage may seem appealing at first, there are some significant drawbacks. Perhaps most frighteningly, legislation passed after the 2008 financial crisis explicitly limits the term of most regulated mortgages to a maximum of 30 years. But there are other reasons why a longer period doesn’t make sense.
Interest rates go up on long-term loans
Indeed, extending your mortgage term from 30 to 50 years can reduce your monthly payments, writes Richard Greene, a professor at the University of Southern California, on LinkedIn. According to Green’s calculations, a 50-year loan would cost $564 per $100,000 mortgage, compared to the same amount of $632 for a 30-year loan.
That means your monthly payments will be about $340 lower on a $500,000 mortgage.
However, this does not take into account the fact that the longer the loan term, the higher the risk for the lender, and therefore the higher the interest rate. Green writes that this is already evident when you look at the difference in interest rates on a 15-year loan and a 30-year loan.
As the loan term becomes longer, capital decreases.
When a homeowner makes a monthly mortgage payment, part of the payment is used to cover interest and part accrues as equity, the owner’s equity in the property. The longer the term of the loan, the less capital is generated.
Thanks to the subprime bubble and collapse of the 2000s, we already have real-world evidence as to why having housing equity is so important. As home prices fell, millions of Americans became “underwater” in their loans, with “negative equity,” meaning they owed more to lenders than their homes were worth.
Extensive research at the time found that while most Americans were trying hard to stay in their homes, they were far more likely to default on their mortgages or walk away from them altogether if they were underwater.
A 2016 academic paper by researchers at Colorado State University and Monmouth University found that “submerged homeowners are 150% to 200% more likely to default on their mortgages than those with positive equity.”
The St. Louis Fed explained this idea in 2014: “Negative equity is a necessary condition for default. Otherwise, households would sell their homes, pay off their mortgages, and keep the remaining funds.”
What is the real reason why house prices are high?
Perhaps the most important reason not to support 50-year mortgages is that they don’t actually get cheaper. There is near universal agreement from housing observers of all stripes that the housing affordability crisis is a (non-)supply and demand crisis.
After the housing bubble burst over a decade ago, construction fell off a cliff and never really recovered. After years of underconstruction, most estimates suggest that the United States needs literally millions more homes. In other words, the crisis won’t end until more housing becomes available for renters, young buyers, seniors, and everyone in between.
