Efforts to enhance homeownership affordability have taken a new turn with President Donald Trump suggesting a 50-year mortgage option in a recent social media post. Federal Housing Finance Agency director Bill Pulte, responsible for Fannie Mae and Freddie Mac, indicated in a follow-up post that they are 'working on it,' describing the concept as 'a complete game-changer.'
The rationale behind a longer-term mortgage is to decrease monthly payments for homeowners. A protracted loan period translates to smaller monthly principal payments required for full repayment. For instance, based on the National Association of Realtors' latest median home price of $415,200 in September and a 6.3% interest rate from Mortgage News Daily, a 30-year fixed loan with a 20% down payment would result in a principal and interest payment of $2,056. By extending the term to 50 years while keeping the interest rate steady, the monthly payment drops to $1,823, saving $233 per month.
However, such a plan does have drawbacks. The pace at which homeowners build equity would slow due to reduced principal payments, with lenders receiving 40% more in interest over the loan period.
How it might work
The feasibility of implementing such a mortgage depends on Fannie Mae and Freddie Mac. Analysts believe it's possible, though a 50-year mortgage currently doesn't meet the 'qualified mortgage' criteria under the Dodd-Frank Act. This act provides investor protection via Fannie Mae and Freddie Mac in case of loan defaults. Though regulators can amend this for mortgage affordability, changes could take a year due to the need for congressional approval, according to Jaret Seiberg, a policy analyst at TD Cowen. Seiberg suggests that Fannie and Freddie might create a secondary market for these loans before policy changes and could purchase them for their portfolios. Still, this wouldn't change lenders' legal liabilities, deterring origination of these mortgages without qualified mortgage adjustments.
How it would impact rates
There's also speculation about changes in mortgage rates. Currently, 15-year fixed mortgages have rates averaging 66 basis points lower than 30-year fixed ones, as per the Mortgage Bankers Association. It suggests the 50-year fixed rate would be higher, influenced by investor interest in the product. 'A secondary market for such loans doesnât exist and wouldnât likely emerge quickly,' noted Matthew Graham of Mortgage News Daily. He warns that these loans might function similarly to interest-only loans due to insignificant principal payments in initial years and higher interest rates than 30-year loans. Thus, building equity would primarily depend on home price appreciationâchallenging amid this yearâs deceleration in home price growth compared to previous years.