In recent years, the dream of home ownership has become something that appears to be getting less and less obtainable for the average family, due in-part to high interest rates on mortgages and elevated asking prices on the part of sellers. But dreams die hard, and there are many who still hold hope that the market will stabilize and re-embrace affordability once again.
And to that end, a rumor has been recently floated on social media that has been increasingly gaining traction: the idea of a 50-year mortgage being introduced as an alternative to the current standard 15 and 30-year loan agreements, with the concept allowing for a longer period of repayment, but with lower, more affordable monthly payments. But how realistic is the introduction of a 50-year mortgage, and would it, in fact, actually lower a borrower’s monthly payments?
To get the answers, we recently spoke to the experts at Artisan Mortgage Company, a wholesale mortgage broker in Bay Shore, NY. And according to President Jim Barry – who founded the company in 2005 – the concept of a 50-year mortgage is something that many of his clients are buzzing about.
However, Barry noted that the reality – if it were ever to come to pass – may not be the catalyst for affordability that everyone thinks it could be, as one thing people are overlooking is that the longer the loan, the greater the accumulation of interest.
“One thing that everyone's been asking me about lately is, ‘Jim, what do you think about the 50-year mortgage?’ Currently, it doesn't exist in our country, although in England and some other European countries, the standard mortgage is 50 years,” he said. “My opinion is, it doesn't really change the affordability all that much. For example, if you took out a mortgage for 50 years and paid it for 50 years, the amount of interest that you pay goes crazy through the roof. So, the savings on a monthly payment is really not that much.”
Barry noted that on a hypothetical $500,000 home loan at a six percent interest rate and with good credit on the part of the borrower, a 30-year loan would result in a monthly mortgage payment of approximately $2,997. However, if those exact same circumstances were applied to a 50-year home loan, that monthly payment would only go down to $2,632, which is a mere $365 difference.
“A few years back, 40-year mortgages were around, and when people would ask me about them, I’d tell them it was a waste,” he said. “You know, you're going to tack on 10 years to drop your payment, what, 75 bucks a month? It's not really worth it, and a 50-year loan would be a similar situation. If you're buying a $700,000 house, $300 a month either way should not make or break you. Meanwhile, you’d probably pay an additional half-a-million dollars in interest over the life of the loan.”
But, despite the internet buzz surrounding it, the concept of a 50-year mortgage in the United States is nowhere near becoming a reality, with Barry saying, “It's a gimmick, you know? It’s not based in reality at all.”
“But, if they ever introduced a 50-year loan, people could take it as a fallback…I would tell them that they could take the 50-year loan, but I want them to make the 30-year payment,” he continued. “Then if you for some reason have a tough month or times get tight and you want to fall back to that 50-year payment for a little period of time, just to kind of give yourself a little bit of breathing room, fine. But I even tell my consumers with a 30-year that you can choose the term of the loan based on the payment you make…if you have a 30-year mortgage and you want to pay it off in 10 years or 20 years, you can do that. I can give you that payment.”
Another topic that Barry has said has contributed to the difficulty of buying a house for many are the rising costs of homeowners insurance.
That’s the biggest thing that I've been seeing stand out to me over the last 12 to 24 months, the rising cost in homeowners insurance,” said. “So, when we talk about a mortgage payment, we talk about your mortgage part, the real estate taxes, and the home insurance. Those are the three components that make up the overall cost of the home.”
“We're on Long Island. We're in New York. We know our taxes are terrible. We're kind of used to that,” he continued. “But previously, if you came to me buying a normal, average home on Long Island, I might estimate homeowners’ insurance to be $1,500 to $2,000 a year in years past. Now, I'm seeing these policies running from $3,000 to $5,000 per year now. It’s a dramatic spike.”
As for a more effective alternative for families looking for an affordable pathway to homeownership, Barry said it would be the introduction of an interest-only option for home mortgages.
“Interest-only would be fine where you could, say, pay interest-only for a period of time. You could always pay principal on top of it if you want, and there's no prepayment penalties,” he said. “If you paid interest-only over thirty years, you would have done nothing and the loan would balloon, but most people aren't going to keep loans for that length of time. They’re going to pay them off sooner.”
To find out more, please visit https://www.artisanhomemortgage.com or call 631-859-9414.