Recently President Trump floated the idea of 50 year mortgages to help with the housing affordability crisis. On the surface you might look at that idea and think well it would lower the payment amount and may make it a little easier to afford a home. But does it really help? Is a 50 year mortgage product something that would make sense? Let’s explore that idea with some actual numbers below!
Comparing a 50 Year, 30 Year, and 15 Year Mortgage
Let’s start our comparison with some basic numbers. Entry level single family homes in the Middle TN area can be expected to be around $400,000. Some will be more and some will be less but I can find several that fit between $350k and $450K that could be considered “starter homes.”
Watch me Explain the 50 year vs 30 year vs 15 year Comparison in the video below
Some Assumptions/Caveats
For this comparison that I’m not factoring in down payment money at all. We are just assuming the loan amount is $400K. The more you pay down intially on a home the better it will work out for payments and interest. Also it is very likely that a 50 year loan product will have a higher interest rate. Any numbers you see here will actally be worse with a higher rate.
Before I continue the analysis I have a free spreadsheet (xlsx file) that you can download and use to see the comparison right here: 50 Year Mortage Rate Comparison
Let’s Look at the Payments
- When you have a 50 year loan at $400k balance at a 6% rate your payment will be $2,105.62 per month.
- A 30 year loan at $400k balance at a 6% rate your payment will be $2398.20 per month.
- By doing a 15 year loan with the same numbers your payment will be $3,375.43. That is around $1k more than the 30 year but all of that and more goes toward the principle.
When you directly compare the 50 year and the 30 year here is what you will notice:
The 50 year monthly payment is $292 less per month but the total interest on the life of the loan is $863,371.51! That’s over twice what the initial balance of the loan was. Your total cost on the home after paying it for 50 years would end up being $1,263,371.51 for that $400,000 home. This is like buying 3 houses!
A 30 year loan would cost you $292 more per month but would be around $400k less in interest over the 30 year period. The total cost for a 30 year loan would then be $863,352.76. That’s still a lot of interest you are paying the bank but it’s significantly better than the 50 year rate.
The best scenario is the 15 year but that requires you to be able to afford the monthly payment comfortably.
My recommendation overall is to avoid the 50 year mortgages altogether and stick to a 30 year mortgage. If you make extra payments on a 30 year mortgage you can pay down that principal faster and reduce that interest.
6 Ways to Pay Down Your Mortgage Faster
- Pay an extra payment toward principal each year.
- Bi Weekly payments will result in an extra payment each year
- Round up to the nearest $100 and have that amount applied to your principal.
- Add a little extra each month to your payment, whatever you can afford at the time.
- Treat your mortgage like a 15 year mortgage, run a quick mortgage calculator and pay the difference between that and your 30 year mortgage. Now you have flexibility with your payment if money is tight one month.
- If you are receiving a tax refund use it as an extra principal payment.
I think one of the most important goals people should have with their home is to have it free and clear of a mortgage by the time they retire. It greatly lessens the income needs during the retirement years and adds a level of financial security that is really important in the later years.
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