Is the mortgage savings in the room with us?

President Trump recently floated the idea of a 50 year mortgage as a way of making homebuying more affordable. The Treasury Department indicated that the idea is probably a nonstarter, and the general sense is that it's not a good idea. OK, but why?

Some history: as part of the New Deal, Congress established a mechanism by which the government would guarantee mortgages, eventually leading to the Fannie Mae and Freddie Mac we know today and crucially, more homes got built. So, the outcome was more houses to buy and more people (but not everyone and not everywhere: the policies were famously discriminatory) having access to a way to pay for them. Banks were now able to offer longer-term fixed rate loans with level payments. Until then, buying property meant buying it outright, or getting a bank to loan you half, which was repaid in small, interest-only amounts over 5 years with a large balloon payment due at the end. The large payment would be refinanced, so borrowers were pretty unprotected against interest rate changes.

These days we typically get either 15- or 30-year mortgage when we borrow to buy a home, the latter being the most popular. How would the math change if a 50-year mortgage was available? Let's look at the numbers.

You're buying a $625,000 property, making a 20% down payment, and borrowing $500,000. These might be some options you're presented with:

15 year mortgage

Interest rate: 5.25%

Monthly payment: $4,019

Total interest paid over life of the loan: $223,490

30 year mortgage

Interest rate: 5.5%

Monthly payment: $2,839

Total interest paid over life of the loan: $522,020

50 year mortgage

Interest rate: 5.75%

Monthly payment: $2,540

Total interest paid over life of the loan: $1,024,074

Yes, usually shorter-term loans have slightly lower rates. So a 50 year mortgage will have a higher rate than a 30 year mortgage.

You can see why the 30 year mortgage is typically the choice of borrowers: substantially lower monthly payments give you flexibility to meet other needs or invest the money. But a 50 year mortgage doesn't save much money each month - only $300 for our example.

And a the bigger problem is this: it will take way longer to build equity with a longer mortgage. Every mortgage payment you make comprises some interest, and some principal. At the beginning of a loan, the proportion is tilted almost completely in favor of interest - this means you're not chipping away much at the amount left on the loan. Gradually, that proportion starts to tilt the other way and at the end of the loan, nearly the entire mortgage payment is applied to principal. The longer the loan, the longer it will take to start building equity. This can be a problem if, for example, you need to sell your home but the real estate market isn't doing great: it becomes more likely that you owe more than the house is worth.

Housing is expensive now because we don't have enough of it. That's the whole story.