An Affordable Mortgage Option May Be Heading Your Way – But Do You Really Want It?
9:05
New mortgage options that could make homebuying cheaper are possibilities. Find out whether they could help or hurt you.
Rising home values and mortgage rates that hover between 6% and 7% contribute to ongoing housing affordability issues. The most recent data from the Federal Reserve Bank of Atlanta showed that on a national basis buyers would have to spend 44% of their income on the median priced home. Housing is considered unaffordable when buyers must spend more than 30% of their income.
While building new homes that offer long term sustainability and lower operational costs is one path to greater affordability, the Trump administration has tossed around a few other ideas to address the financing angle. The latest suggestions include:
50-year loans: This would allow buyers to extend their loan term beyond the current traditional maximum of 30 years to lower monthly payments.
Portable loans: Allowing homeowners to transfer their loan terms, including the interest rate and balance, to a new property.
Assumable loans: Increasing the availability of assumable loans, which allow buyers to take over the existing loan of the sellers if it has a lower interest rate.
All three ideas have pros and cons, and experts have some other ideas about how to lower home financing costs, too.
50-Year Loan: You’ll Pay for It
Borrowing for a 50-year term rather than a 30-year term is likely to lower your payments, but there are some drawbacks, too. ALendingTree study found that if you borrowed $500,000 at 6.10%, your payment on a 50-year loan would be $2,669 compared to $3,030 with a 30-year loan or $4,246 with a 15-year loan. However, the interest payments are significantly more over the life of a longer loan.
“A 50-year mortgage just extends the term of the loan, which theoretically, would lower the payment from a 30-year mortgage, but the rate is likely to be much higher,” saysMelissa Cohn, regional vice president of William Raveis Mortgage.“Much of the benefits of the longer-term loan will be lost by the higher rate.”
Typically, interest rates are higher on longer term loans, so the monthly payment gap could be even smaller with a 50-year loan. For example, if the 50-year loan interest rate was 7%, the monthly payment would be $3,008 compared to $3,030 for the 30-year loan at 6.10%.
“With a 50-year mortgage, it takes years before a homeowner ever builds any equity,” Cohn says.
That’s because borrowers usually pay more in interest in the early years of a mortgage. The LendingTree analysis found that after 10 years of loan payments on a $500,000 loan at 6.10%, borrowers would have paid just 4.2% of their loan balance and have an additional $20,989 in home equity beyond their down payment with a 50-year loan, compared to 16.09% and $80,459 in equity for a 30-year loan.
But Phil Crescenzo Jr., vice President, Southeast division atNation One Mortgage Corporation, sees some potential positive outcomes from a 50-year mortgage, especially lower monthly payments.
“I feel like anything that opens more doors has benefits and is at least a conversation starter,” Crescenzo says. “Considering that most homebuyers are going to change financing well in advance of that 50-year term, it could be a door opener for some. The overall interest should be factored in, of course, but also consider the time the mortgage would be held by that homeowner.”
Crescenzo suggests that homeowners who take out a 50-year loan could make additional payments to shorten the loan term and build equity faster, while taking advantage of the lower required payments during months when their finances are tighter. However, he recognizes that new homeowners may not be focused on paying extra to lower their balance and pay less interest over time.
“A significant amount of overall interest accrues by adding to the loan term, but this also must factor in how long someone would actually remain in the existing loan,” Crescenzo says. “So, some other variables are not factored in by only calculating the maximum interest paid over the life of the loan.”
The LendingTree analysis found that borrowers would pay $1,101,430 over the 50-year loan term for a $500,000 loan, compared to $590,791 for a 30-year loan and $264,342 for a 15-year loan.
“The tradeoff of interest vs principal paid on the loans is the main cause for concern, but when comparing NOT purchasing the asset, it's hard to make that argument vs what a tenant would gain from only renting a home,” Crescenzo says. “I believe if the right education is out there, and this is not considered a long-term option, the risk is mitigated.”
Portable Loan: A Long Shot Option
A portable loan is a mortgage that you can take with you to a new home when you sell your current residence, so it would benefit current homeowners but not first-time buyers, who are the most impacted now by affordability issues.
“This is a concept other countries have options for, but the structure is very different to how mortgage lending works in the United States,” Crescenzo says. “Therefore, I don't consider this idea realistic in the near future. In theory, the benefit is that a mortgage with a low rate could be moved to a different property, but several aspects haven’t been explained yet.”
One issue Cohn points out is that a portable loan would likely only be for the remaining balance of the loan.
“If you need to borrow more money, you will have to find a home equity loan or line of credit, which have higher rates,” Cohn says.
Assumable Loan: An Occasional Win
FHA and VA loans can be assumable now, which means that sellers can transfer their low-interest rate loans to buyers if their lender allows it.
“If assumable loans were allowed for all conventional mortgages, then low-rate mortgages can be protected,” Cohn says. “But it's only assumable for the remaining principal loan balance. You can't increase the loan amount.”
That means buyers would need to come up with more cash or a second mortgage to make up the difference.
“For example, if someone is buying a $400,000 home and assuming a prior VA loan at a low rate for $300,000, they are short by $100,000,” Crescenzo says. “For a veteran used to not needing a down payment at all, this is quite a hurdle to cross.”
Other Affordability Options
Generally, Cohn and Crescenzo are skeptical about any widespread potential impact of these options.
“I don’t think a 50-year mortgage will help the market,” Cohn says. “The higher rates would offset any benefits in the longer term. Portable mortgages would work for some buyers who have cash to add to the loan for their next purchase. Assumable mortgages, too, will benefit those who have money to make a bigger downpayment.”
A better solution, according to Cohn, would be to get Fannie Mae and Freddie Mac, the quasi-government mortgage giants, to reduce or eliminate their fees for conventional loans.
“These ‘loan-level price adjustments’ tack a percentage of the loan amount onto the mortgage to be paid either at closing or through the borrower’s mortgage payments,” Cohn says. “For example, these adjustments can make condominiums a lot more expensive than single-family homes. If you remove these fees, mortgage rates could drop by 25 to 50 basis points without anything happening in the bond market.”
Crescenzo doubts that the three options – 50-year loans, assumable loans and portable loans – will all be implemented. Even if they were, he doesn’t believe it would move the needle on affordability.
“There are drawbacks in each scenario, and they are not market movers that would create significant impact,” he says.
Instead, he suggests eliminating capital gains taxes on home sales for three years to encourage homeowners to sell.
“I would also suggest some government tax abatements for new homebuyers in the market,” Crescenzo says. “These two moves would create momentum immediately in the sector.”
In the meantime, homebuyers can shop for a mortgage to find the best available option and look for sources offunds to supplement their savings.
An Affordable Mortgage Option May Be Heading Your Way – But Do You Really Want It?
New mortgage options that could make homebuying cheaper are possibilities. Find out whether they could help or hurt you.
Rising home values and mortgage rates that hover between 6% and 7% contribute to ongoing housing affordability issues. The most recent data from the Federal Reserve Bank of Atlanta showed that on a national basis buyers would have to spend 44% of their income on the median priced home. Housing is considered unaffordable when buyers must spend more than 30% of their income.
While building new homes that offer long term sustainability and lower operational costs is one path to greater affordability, the Trump administration has tossed around a few other ideas to address the financing angle. The latest suggestions include:
All three ideas have pros and cons, and experts have some other ideas about how to lower home financing costs, too.
50-Year Loan: You’ll Pay for It
Borrowing for a 50-year term rather than a 30-year term is likely to lower your payments, but there are some drawbacks, too. A LendingTree study found that if you borrowed $500,000 at 6.10%, your payment on a 50-year loan would be $2,669 compared to $3,030 with a 30-year loan or $4,246 with a 15-year loan. However, the interest payments are significantly more over the life of a longer loan.
“A 50-year mortgage just extends the term of the loan, which theoretically, would lower the payment from a 30-year mortgage, but the rate is likely to be much higher,” says Melissa Cohn, regional vice president of William Raveis Mortgage. “Much of the benefits of the longer-term loan will be lost by the higher rate.”
Typically, interest rates are higher on longer term loans, so the monthly payment gap could be even smaller with a 50-year loan. For example, if the 50-year loan interest rate was 7%, the monthly payment would be $3,008 compared to $3,030 for the 30-year loan at 6.10%.
“With a 50-year mortgage, it takes years before a homeowner ever builds any equity,” Cohn says.
That’s because borrowers usually pay more in interest in the early years of a mortgage. The LendingTree analysis found that after 10 years of loan payments on a $500,000 loan at 6.10%, borrowers would have paid just 4.2% of their loan balance and have an additional $20,989 in home equity beyond their down payment with a 50-year loan, compared to 16.09% and $80,459 in equity for a 30-year loan.
But Phil Crescenzo Jr., vice President, Southeast division at Nation One Mortgage Corporation, sees some potential positive outcomes from a 50-year mortgage, especially lower monthly payments.
“I feel like anything that opens more doors has benefits and is at least a conversation starter,” Crescenzo says. “Considering that most homebuyers are going to change financing well in advance of that 50-year term, it could be a door opener for some. The overall interest should be factored in, of course, but also consider the time the mortgage would be held by that homeowner.”
Crescenzo suggests that homeowners who take out a 50-year loan could make additional payments to shorten the loan term and build equity faster, while taking advantage of the lower required payments during months when their finances are tighter. However, he recognizes that new homeowners may not be focused on paying extra to lower their balance and pay less interest over time.
“A significant amount of overall interest accrues by adding to the loan term, but this also must factor in how long someone would actually remain in the existing loan,” Crescenzo says. “So, some other variables are not factored in by only calculating the maximum interest paid over the life of the loan.”
The LendingTree analysis found that borrowers would pay $1,101,430 over the 50-year loan term for a $500,000 loan, compared to $590,791 for a 30-year loan and $264,342 for a 15-year loan.
“The tradeoff of interest vs principal paid on the loans is the main cause for concern, but when comparing NOT purchasing the asset, it's hard to make that argument vs what a tenant would gain from only renting a home,” Crescenzo says. “I believe if the right education is out there, and this is not considered a long-term option, the risk is mitigated.”
Portable Loan: A Long Shot Option
A portable loan is a mortgage that you can take with you to a new home when you sell your current residence, so it would benefit current homeowners but not first-time buyers, who are the most impacted now by affordability issues.
“This is a concept other countries have options for, but the structure is very different to how mortgage lending works in the United States,” Crescenzo says. “Therefore, I don't consider this idea realistic in the near future. In theory, the benefit is that a mortgage with a low rate could be moved to a different property, but several aspects haven’t been explained yet.”
One issue Cohn points out is that a portable loan would likely only be for the remaining balance of the loan.
“If you need to borrow more money, you will have to find a home equity loan or line of credit, which have higher rates,” Cohn says.
Assumable Loan: An Occasional Win
FHA and VA loans can be assumable now, which means that sellers can transfer their low-interest rate loans to buyers if their lender allows it.
“If assumable loans were allowed for all conventional mortgages, then low-rate mortgages can be protected,” Cohn says. “But it's only assumable for the remaining principal loan balance. You can't increase the loan amount.”
That means buyers would need to come up with more cash or a second mortgage to make up the difference.
“For example, if someone is buying a $400,000 home and assuming a prior VA loan at a low rate for $300,000, they are short by $100,000,” Crescenzo says. “For a veteran used to not needing a down payment at all, this is quite a hurdle to cross.”
Other Affordability Options
Generally, Cohn and Crescenzo are skeptical about any widespread potential impact of these options.
“I don’t think a 50-year mortgage will help the market,” Cohn says. “The higher rates would offset any benefits in the longer term. Portable mortgages would work for some buyers who have cash to add to the loan for their next purchase. Assumable mortgages, too, will benefit those who have money to make a bigger downpayment.”
A better solution, according to Cohn, would be to get Fannie Mae and Freddie Mac, the quasi-government mortgage giants, to reduce or eliminate their fees for conventional loans.
“These ‘loan-level price adjustments’ tack a percentage of the loan amount onto the mortgage to be paid either at closing or through the borrower’s mortgage payments,” Cohn says. “For example, these adjustments can make condominiums a lot more expensive than single-family homes. If you remove these fees, mortgage rates could drop by 25 to 50 basis points without anything happening in the bond market.”
Crescenzo doubts that the three options – 50-year loans, assumable loans and portable loans – will all be implemented. Even if they were, he doesn’t believe it would move the needle on affordability.
“There are drawbacks in each scenario, and they are not market movers that would create significant impact,” he says.
Instead, he suggests eliminating capital gains taxes on home sales for three years to encourage homeowners to sell.
“I would also suggest some government tax abatements for new homebuyers in the market,” Crescenzo says. “These two moves would create momentum immediately in the sector.”
In the meantime, homebuyers can shop for a mortgage to find the best available option and look for sources of funds to supplement their savings.
Publisher’s Note: This content is made possible by our Today’s Homeowner Campaign Sponsors: Whirlpool Corporation. Whirlpool Corporation takes sustainability seriously, in both their products and their operations. Learn more about building and buying homes that are more affordable and less resource intensive.
By Michele Lerner, Associate Editor
Michele Lerner is an award-winning freelance writer, editor, and author who writes about real estate, personal finance, and business.Also Read