Cash Flow Boost or Affordability Illusion?

Dave:
President Trump has floated the idea of a 50 year mortgage. This could reduce monthly mortgage payments by hundreds of dollars per month for the average homeowner or investor, but at the same time, it would nearly double the amount of interest you pay over the lifetime of the loan. So would you take on a 50 year mortgage today? I’m gonna help you understand everything you need to know about this proposed new loan product and give you my take on whether the 50 year mortgage could make sense for real estate investors. Hey everyone. Welcome to On the Market. I’m Dave Meyer. Thank you all so much for being here today. This past weekend on November 9th, president Trump posted on social media his support for a 50 year mortgage. The idea here is that a longer amortization period will decrease monthly payments, ease debt to income requirements, and thereby help more Americans get into the housing market.
This is not the first time a longer amortized mortgage has been floated. People have been talking about 40 year mortgages for a while, but it does seem that by vocalizing his support, president Trump is getting more serious. And Bill Pulte, who is the director of the FHFA, which oversees mortgage giants, Fannie Mae and Freddie Mac, he has actually said that those agencies are working on it. So as of now, the loads aren’t available, but it is already sparking some pretty heated debate online about whether this is a good idea in the first place. And as you can probably tell, what happens here will certainly have big impacts on the housing market, and it could impact overall affordability. It can impact buyer demand, cashflow potential, and more. So today we’re gonna talk about everything we know so far and what the potential implications are. We’ll talk about the pros and cons, what the supporters say, what the detractors say, and I’ll give you all my personal opinion on the topic as well.
Let’s get into it. First up a little background, what is a 50 year mortgage and why is this a big departure from where we have been? First thing we all need to know and recognize is that although in the United States, the 30 year fixed rate mortgage is the most common one, there are tons of different formats for mortgages across the world. And in fact, the US housing market is very unique and pretty special in this regard because it has the 30 year fixed rate mortgage. And in a lot of ways, our housing market has sort of been built on the back of this very unique loan product. I know for Americans it does sound really normal because in the US it is, but in almost every other country in the world, the average mortgage is adjustable rate debt. They get a mortgage selecting for a couple of years, then it adjusts with interest rates every couple of years, which can make your mortgage payments lower upfront.
But it introduces a lot more uncertainty for buyers. That’s how most countries do it. But after World War II in 1948, actually, the United States was looking for ways to make home ownership more affordable and to boost the housing market. And they authorized the first 30 year fixed mortgage. It was specifically for new construction in the beginning, back in 1948. Then a couple years later in 1954, they authorized it for existing homes. And since then, it’s basically been the mortgage that almost everyone uses. As of right now, bank rate estimates that 70% of outstanding mortgages as of today are 30 year fixed and 92% are fixed rate in general. So some of them might be 15 or 20 year mortgages, but 92% of mortgages are fixed rate. Which side note is one of the reasons I believe that residential housing in the United States is such a good thing to invest in and why the market is unlikely to crash is because this fixed rate debt provides a lot of stability to the housing market that other industries just straight up don’t have.
So I think most people would agree that so far the 30 year fixed rate mortgage has worked pretty well in the United States. So the question that becomes why change it? Why mess with something that’s been working? Well, the answer comes down to affordability of course, and I’m a broken record, I talk about this on every show, but affordability is the challenge in the housing market and it’s what President Trump is trying to address with this proposal. The US housing market is near 40 year lows for affordability. Home sales are super slow. They’re at about 4 million annualized, which is like 30% below normal and with more rate stinks stubbornly high by recent standards. Despite fed rate cuts, there is no real clear path to better affordability, at least in the short term. Now, I’ve said on the show many times that I think affordability has to come back for us to have a housing market, and I do believe it will, but as of right now, just assuming this 50 year mortgage doesn’t come just for this one next point, affordability will come back most likely in the great stall.
The thing that I’ve been talking about a little bit, which is slowing housing price, maybe negative housing prices in some areas, meanwhile, increasing wages, modestly declining mortgage rates, those three things combined could get us back to affordability. But that’s gonna take time. That’s not gonna happen in the next year. It might not even happen in the next two or three years. It will take time on the current trajectory that we’re in. So President Trump, in proposing a 50 year mortgage is looking for a way to improve affordability sooner to make housing more affordable and give the housing market a bit of energy that it’s been missing for about three years now. So that’s the idea, but the question is will it work? Is this a good idea for homeowners? Is it a good idea for investors? Is it even allowed? Let’s talk about what this could actually do, and I’m gonna walk you through an example just using real numbers so you can see what the potential a 50 year mortgage has.
We’re gonna use an example using the median home price in the us. That’s $430,000 as of today. So we’re gonna start with that. We’re gonna assume pretty standard vanilla home purchase, 20% down and a 6.5% mortgage rate. If you were to go out and buy that today using the standard 30 year fixed rate mortgage, your monthly payment would be $2,175. I’m gonna do a little bit of rounding, but it’s about 2175. So that’s what most people look at is the monthly payment, which is 2175. But as investors, we need to look at other things that are going on in this loan because as you probably know, real estate investors don’t just make money on cashflow, which would benefit. Cashflow would get better if you had a lower monthly payment. But there’s an other old category of return that you need to consider, which is amortization, basically paying back your loan using income that you generate through rent that is known as loan pay down.
I’m gonna call it amortization. That’s sort of the technical term for it. And amortization actually provides a real return on your investment in year one of this loan. This example that I’m giving you, again, 430 K purchase, 20% down 6.5 mortgage rate, 30 year fixed. You would pay down using income from rent $3,850 of principal in that first year giving yourself an ROI of above 4%. Now, of course, 4% isn’t some incredible return, but it provides a really solid floor to your investment, right? Because even if your cash flow is 5%, you combine those three things together, you’re getting 9%. That’s without any of the tax benefits, that’s without any appreciation. So this is a meaningful part of the overall return profile that you were looking for as a real estate investor. The other thing to mention is that your benefit that you get from amortization increases over time.
This is a little bit technical, but basically the way that every mortgage works every 30 year fixed rate mortgage is, is that even though your monthly payment doesn’t change from month one to month two to month 360, it’s the same monthly payment. The amount of that payment that goes to principle, which is what you’re paying down, and the amount that goes to interest, which is profit for the bank, changes over time, and I’m sure you’re not surprised to hear this, but the amount that you pay to interest profit to the bank is very heavily front loaded, meaning that your first payment is gonna be heavily interest and you don’t pay off that much. But each subsequent payment that you make, you are paying off more and more and more. So when you get to year two, year five, year 10, year 20, your amortization benefit actually goes up.
So as an example, using this loan, yeah, it’s 4.4% your ROI on that year one, but by year 10, that goes up to 8%. That’s pretty good. By year 2025, it’s above 20% and it ends close to 30% with this mortgage. You are getting a solid floor in amortization the whole way, and it just gets better over time. That is super valuable. Over the lifetime of this loan, as you’re paying these 2175 payments, you will pay a total of $439,000 in interest, which is extremely similar to the price of the house. Remember, price of the house is four 30. So just rounding this, you’re basically saying that using this loan that I’m using as an example, you’re paying the house twice, you’re paying four 30 for it, and then you’re paying $439,000 in interest, which is a ton of interest when you look at it that way, but spread out over 30 years.
That’s kind of what our housing market is based off and what most people are comfortable with. So that’s a 30 year option. What about the 50 year option? Well, if you look at it with the same mortgage rate, which I should say is probably not going to happen. If a 50 year mortgage does come about, the mortgage rate is going to be higher than that of a 30 year note. There’s a lot of reasons for that. But it’s basically at higher risk for the bank to guarantee your mortgage rate for 50 years. And so they’re gonna charge you more in terms of interest rate for that increased risk that they are taking up. You notice this already right now, for a 15 year fixed rate mortgage, it’s about 50 to 75 basis points lower than a 30 year. And so we can assume that if you know your 30 year is six and a half, your 50 year would be seven, seven and a quarter, something like that.
But for the purposes of this example, ’cause we don’t know how much more it is, I’m just gonna use the same interest rate that drops your monthly payment from 2175 to $1,940, or in other words, $235 per month, about a 10% decrease in your monthly payment or 10% savings. How you wanna look at it, that’s not bad. It’s gonna make your cash flow better, it’s gonna make your cash on cash return look better. And there’s definitely something to that. That is the primary benefit of this 50 year option. But we have to look at the trade-offs here too, because obviously it’s not all upside for investors. When you look at the 50 year option, the principle that you pay down, the benefit you get for paying down your mortgage is just $934. Remember, compare that to the 30 year option. It was 38 50. So it’s basically only a quarter of the benefit that you get for amortization, or if you wanna look at it in the return on investment perspective.
Remember I said 30 years, 4.4%, your amortization, ROI drops to just 1.1% on a 50 year mortgage. And this means it takes you longer to build equity. It drops the floor of your return for your investment relatively low, which is a significant trade off. In a way, you are sort of trading amortization for cashflow, which is an okay decision for some people, but you have to recognize that this is a significant trade off. But the real kicker here too, on top of just amortization, is the total amount of interest paid. If you are accruing interest for 50 years, the total interest that you will pay over those 50 years on a $430,000 house is $819,000. Meaning that if you actually held onto this property for 15 years, which is a big if, and we’re gonna talk about that in just a second, you would pay a total of $1.24 million for a $430 house.
You were essentially paying for this property three times, two times in just interest, one time for the price of the house as opposed to paying two x for the 30 year mortgage. So that is a very significant difference. Now, I know that a lot of people are watching this and listening to this and thinking, well no and hold onto their property for 50 years. And that’s true, and that’s why for some people this might make sense if it does come to be ’cause it will improve your cash flow. But I do wanna call out that you will build equity at a lower rate no matter how long you own this property, because as I just talked about, the amortization benefit really declines. It goes to about a quarter of what it would normally be. So that equity that you normally build in a 30 year mortgage at a four, five, 6% clip, you are gonna be building that at a one two, 3% clip, which really matters over time and will matter regardless if you hold onto this property for two years, five years, or 10 years.
And if some people are saying, oh, I just do it upfront and then I’ll refinance. Well, that’s true, you could do that, but your amortization schedule restarts when you refinance, which means you go back to paying max interest on that first payment again and less principle. And you have to sort of start that curve all over again. So hopefully this helps. As an example of what a 50 year mortgage could do, it lowers the average payment by $235 per month, but also significantly increases the total amount of interest paid by the borrower. That’s the trade-off at hand. So the question now becomes, is this a good idea in general, is this a good idea to introduce for the United States? But also is it a good idea for real estate investors specifically? We’re gonna get into that, but we do have to take a quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer talking all about the 50 year mortgage that President Trump proposed just a couple of days ago. Before the break, we talked about what the trade-offs are in terms of the math and underwriting deals. Now I wanna turn our attention to whether or not this is a good idea in general for the United States, the housing market, and specifically for real estate investors. Now, let’s just talk about pros and cons because there are both. There is no right answer here. There are trade offs. The pros of a 50 year mortgage. People who are supportive of this idea point out that a 50 year mortgage would increase housing affordability in the short term, and that is absolutely true. We just talked about that it would be a roughly 10% reduction in the monthly payment since there are a lot of people on the sidelines or potentially people, you know, it’s just sort of on the fringe of whether they want to get into the housing market or not.
This could be the boost that they need. This could increase demand and give the housing market a bin of juice that it’s been missing for the last couple of years. It is hard to say and quantify how much, $200 in savings on the medium price home would increase demand, but I do think it would at least increase some demand. Anytime you see affordability, improved demand should increase other things being equal, and I think we would see that happen. And what happens when demand goes up? Well, prices go up as well. And so depending on who you are, you might see that as a benefit or a negative. Like if you already own property, if you’re an existing investor, if you’re a real estate agent, if you’re a mortgage broker, you’d probably wanna see these things happen, right? You wanna see some activity back into the housing market, you’d like to see home prices go up.
So that’s a benefit there. The other benefit is it’s still a fixed rate mortgage, which I always love. It’s a predictable payment schedule for the borrower, which is great. And although we don’t have the specifics yet, I would assume that the terms of a 50 year would be similar to the terms of a 30 year for most homeowners, assuming you could still prepaid a mortgage without penalty, you could refi into a different product at any time. So this could just be a tool to add flexibility to the market. It’s another potential option for home buyers. So those are the pros. What about the comments? Well, we already talked about one of ’em. That is that there is just much higher total interest, right? You would be paying way more to the bank over the lifetime of your loan and you would build up equity much slower from a math perspective, just on an individual deal basis, that is guaranteed on a 50 year mortgage.
The second thing, again, depending on who you are and how you view these things, the price impact could be negative because adding that new demand, making housing more affordable by adding a 50 year mortgage could push up prices and in the short term affordability would get better. But you gotta think about what’s gonna happen a couple of years from now when all the people who are sort of on the fringe and are gonna be boosted into the market from that $200 benefit. What happens when they push the prices of homes back up and then all of a sudden prices are unaffordable again? Is this actually better with the affordability bump even less? I think that’s a super important question and a potential downside to this proposal is that it doesn’t actually fix the problem. It doesn’t fix affordability in the long run. It’s just kind of kicking the can down the road.
The other thing that I mentioned earlier that I just wanna reiterate is that on a 50 year mortgage, your rates will be higher. In my example, I use six and a half for both. But my guess is that if six and a half was the normal for a 30 year fixed, we’d see mortgage rates on a 50 above seven. And so you’ll not just be paying an accruing interest for 20 years longer, you’ll be accruing that at a higher rate. Another reason that your total interest and your amortization are gonna be worse than if you use a shorter term loan. Now, those are just roughly the pros and cons. I’ll say that experts, people who talk in this field, I’m just giving you a rough benchmark, I think most of them are not in favor of this idea. There are some prominent people who I respect who are in favor of this idea, but I wanna just read something that Logan Mo wrote.
He’s a frequent guest on this podcast. He writes for Housing Wire. He’s one of the best analysts in the game. I read everything he writes and he wrote, I quote, I understand that we have housing affordability challenges in America, but subsidizing more demand from 30 to 50 year mortgages is not the policy we wanna take. Now. Housing has to balance itself out through slowing home price growth and wage increasing as it has for many decades to add another subsidization to the market, just prevents that healing process from occurring, which also prevents less equity build out as well. So I am not a fan of any increasing in the amortization. The 30 year fix is perfectly fine as is and quote, that is a perfect summary of how I feel about this idea, although I think is an interesting idea. I do not believe this is actually going to provide the long-term fix that we need for the housing market or affordability.
And there have been plenty of ideas, this being one of many that are short-term fixes to the housing market problems that we have. But I like Logan, think that this is at best a temporary bandaid and it will actually slow down the real correction that needs to happen in the housing market. To me, the great stall that I’ve been describing on the show for a while is the better option. I personally would prefer for the market to be flat or even decline for a couple of years modestly, I’m not saying it crashed, but decline for a couple of years so that prices become more affordable while wages rise, while mortgage rates come down a bit, all while hopefully there is some government action to actually increase supply in the housing market as well. To me, this is the sustainable way that the housing market gets better in a more permanent sense than just putting a bandaid on it and trying to make affordability better.
In the short run. If we just introduce a 50 year mortgage, that will help in the short run. It will bring a new demand, it will push up prices though, and those homeowners will just be paying more and more to the bank and will still have a long-term affordability problem. So I’m not saying that it wouldn’t work in the short term. I’m not saying that people wouldn’t use it. I do think people would use it. I’m just saying I think that the better long-term affordability path is through stall or slightly declining housing crisis, which is already starting to happen. We’ve talked about this, but last four or five months, we’re already seeing the great stall materialize. The prices are stagnating, they’re starting to come down. They’re down in real terms. Mortgage rates have come down modestly, real wages are growing. That means four or five months in a row, housing affordability has improved.
It’s just going to be slow. Now, I do wanna acknowledge that if they introduce a 50 year mortgage, that it could bring some life into the housing market, which we do really need. I get that. I feel that, but I think it would be temporary, which is why I am not into this idea so much. It’s a bandaid and delays the long term fix. If this was some bandaid that could hold things together while the long-term issue was worked out, I would be into that. But I think this would actually actively slow down the long-term housing improvements just to bring forward some demand and sales and then we’d be back in the same place a couple years from now. All right, everyone, we gotta take a quick break to hear from our sponsors, but we’ll be back with more on the 50 year mortgage right after this.
Welcome back to On The Market. I’m Dave Meyer. Let’s dive back into our conversation about 50 year mortgages. That’s my general take, but I wanted to answer if they do get introduced, would I personally use them? My answer to that is no, not at this stage of my investing career. $200 a month in cashflow is just not worth it to me to lose amortization essentially and pay double the interest. I would rather go out and find a better deal that works at a 30 year fixed rate mortgage. That’s a more reasonable timeframe that I can wrap my head around like I am 38 years old right now. I can go buy properties that the 30 year fixed and reasonably hold onto them and have them paid off in my retirement. I actually recently, in the last couple of weeks, I’ve been looking at using 15 year notes because I hope to be retired in about 15 years and I’d like to pay that off.
So I am more interested in sacrificing short-term cash flow so that I can pay less total interest, and by the time I really need my cash flow when I’m actually retired, I won’t have any debt at all. That’s currently how I think about it. Now, if I were in a totally different phase of my investing career, I would consider it, right? I, I don’t know if I would do it, but I can imagine a world where I would consider it. Like if I was 55 years old or 60 years old and I wanted to buy new properties and I don’t really care about the long-term interests, I don’t care. I just wanna maximize cashflow. All I care about at that point in my life is cashflow. I might do it, I might think about it, I’m not sure. But I do think that there is an argument to be made that for investors who are almost entirely cashflow focused, that this would actually be good.
Now, what we know from President Trump and Bill Tate is very little. We do not know if they implement a 50 year mortgage, if it would even be offered to investors. We don’t know, like this might just be a primary homeowner thing, but I just wanted to share with you some of my thoughts about this topic. But before we go, I just also want to talk a little bit about just benchmarking. Will it happen? Obviously we don’t know, but I just wanted to call out that as of right now, the rules that dictate a lot of mortgage lending in the United States do not allow it. Under the Consumer Financial Protection Bureau’s ability to repay qualified mortgage rule, a qualified mortgage loans term cannot exceed 30 years. That’s the current rule. A 50 year loan still could exist, but it would be non-qualifying. That means there would be fewer legal protections.
It would be harder and costlier to get, or they could just change those rules, which might happen Now, right now, if you look at the FHA, you might know that there are 40 year modifications allowed, but not origination. So basically, you can’t apply for an FHA loan with a 40 year modification. But since all these banks have these new tools, now these lenders have tools to mitigate foreclosures and delinquencies. They can recast your mortgage essentially into a 40 year modification. That’s possible right now, but you can’t originate at 30 years. This is true in the VA too. It’s 30 years as well. And the same with the GSE. So Fannie and Freddie, they won’t buy 50 year terms. So those are non-conforming loans. So the bottom line here is that like a, a big sweeping change to get 50 year mortgages cheap would require regulatory changes to the CFPB, to Consumer Financial Protection Bureau to amend those qualified mortgage terms.
Then you need FHFA to change Fannie and Freddie guides, that kind of stuff. That is all possible. Actually, Congress isn’t required. They could choose to try and legislate these things, but it would not require Congress to change these things. They’re more rule changes within government agencies. So I think there’s a reasonable chance this happens. Obviously, it’s just been a preliminary conversation, but it does seem like there is a administrative pass for this to happen, should President Trump want to pursue it. So overall, just in conclusion, I do think this is something we gotta watch because if it happens, we could see demand into the market that could help the housing market in the short term. But my guess is that that would only last for a couple of years, and I think it could be concentrated mostly on lower price homes. I just don’t really see a scenario where people who can afford a 30 year mortgage choose to go with the 50 year mortgage, just a $200 in savings or $400 in savings.
It’s just not enough for how much interest you’re paying over time. The trade-offs just seem tilted in the wrong direction to me, and so I think maybe people who have no other option, we’ll use this as an option, but it won’t be that broadly adopted. That said, I still think it’ll bring demand and provide some transaction benefit in the housing market. But again, regardless if this gets adopted or not, the big ugly affordability challenge we have right now in the US housing market is gonna come back. Unless supply is added and prices moderate. That’s the only thing that’s really going to work long term. That’s my take. Obviously, there’s no right answers here. People feel strongly about both sides. There are reasonable arguments on both sides of this equation. So I’m curious what you think. Let us know what you think about the prospects of a 50 year mortgage in the comments below if you’re watching on YouTube or in the comments if you’re listening on Spotify. Thank you all so much for listening to this episode of On the Market. I’m Dave Meyer. I’ll see you next time.