30 vs 50 Year Mortgage Calculator

0:00 What’s up, guys? It’s Graeme here. So, 0:01 this is absolutely crazy. Over the 0:04 weekend, President Trump tweeted the 0:06 idea of creating a 50-year mortgage as a 0:08 way to help lower payments for people 0:09 who want to buy a home. And I know I 0:11 might get some push back for saying 0:12 this, but to me, it’s obvious. A 50-year 0:15 mortgage is an absolute disaster waiting 0:18 to happen, and no one should ever take 0:20 that option ever. In fact, a 50-year 0:23 mortgage is completely uncharted 0:25 territory. And if one thing goes wrong, 0:27 it could completely devastate both the 0:30 housing market and the borrower. So, 0:32 let’s talk about the actual math behind 0:34 getting a 50-year mortgage, if and when 0:36 it ever makes sense, and my own thoughts 0:39 as someone who’s been in real estate 0:40 since 2008. Because I got to say, most 0:43 people have very little understanding 0:45 with how this works and why it’s a 0:47 really, really bad idea. Although before 0:49 we go into that, if you appreciate 0:51 videos like this where we just cover the 0:53 facts, it would mean the world to me if 0:55 you mortgaged the like button or 0:56 refinance the subscribe button for the 0:58 YouTube algorithm. It helps out 1:00 tremendously and is a thank you for 1:01 doing that. Here’s a picture of a baby 1:03 polar bear. So, thanks so much and also 1:05 big thank you to Helium Mobile for 1:06 sponsoring this video, but more on that 1:08 later. All right, so to start, let’s 1:10 talk about where all of this begins. The 1:12 30-year mortgage. For those unaware, 1:14 this was initially created in the 1940s 1:16 as a way to help finance the 1:18 construction and sale of new homes after 1:20 World War II. And then by the end of the 1:22 1950s, it was adopted throughout the 1:24 entire market as a way to incentivize 1:27 families to build long-term equity. 1:29 Well, wouldn’t you know it, these days, 1:31 the 30-year mortgage has become so 1:33 popular that more than 90% of buyers 1:35 pick a 30-year term on their mortgage. 1:37 Now, obviously, there are more options 1:39 today for buyers to pick from, like an 1:41 adjustable rate mortgage, interestonly 1:43 mortgage, 15-year terms, and so on. The 1:45 options are pretty limitless, but the 1:47 30-year term is often seen as the 1:49 safest. It offers the most flexibility, 1:51 the most stability, your price is fixed 1:54 until the home is paid off, and if you 1:56 qualify, they’re pretty easy to get 1:58 because almost every bank offers them. 2:00 However, there is a bit of a catch 2:02 because your interest payments are 2:03 front-loaded towards the beginning of 2:05 the loan. For example, with any fixed 2:07 rate mortgage, your monthly payment is 2:09 split into two parts, principal and 2:11 interest. In the beginning, most of your 2:13 payment goes towards interest because 2:15 you still have the full loan balance. 2:17 And so, very little of your monthly 2:18 payment actually pays down the loan. But 2:20 as time goes on and your loan balance 2:22 gets smaller, more of that payment 2:24 begins going towards principal. And over 2:27 time, you could finally start building 2:29 equity. Like this chart really shows it 2:31 perfectly. As you could see, at first 2:33 your monthly payment consists of almost 2:34 all interest. But by the time year 20 2:37 comes around, this flips to the point 2:39 where most of your payment becomes 2:40 equity. And that’s where things get very 2:43 interesting. See, the typical person 2:45 only keeps their home for an average of 2:47 12.3 years. Meaning on a 30-year loan at 2:50 6% interest, they’ve barely begun to pay 2:53 off their mortgage by the time they sell 2:55 the home, get a new loan, and start the 2:57 process over again. Even if they kept 2:59 the home for the full 30 years, they 3:01 will have paid $1.2 million to buy that 3:04 $600,000 home 30 years earlier. So, why 3:08 don’t more people go for the 15-year 3:10 mortgage? When you look at a 15-year 3:12 mortgage, you’re going to notice that 3:13 your monthly payments are significantly 3:15 more expensive. And here is a real 3:17 example of a $500,000 house, 6% 3:20 interest, 20% down. If you pick a 3:22 30-year mortgage, your monthly payment 3:24 is going to be about $2,400 a month. and 3:26 a lender will qualify you for that 3:28 payment if you make about $7,500 a month 3:31 or three times the mortgage payment. 3:33 Pretty simple. However, if you get a 3:35 15-year mortgage, your monthly payment 3:37 is going to be about $3,300 a month, 3:39 which is going to require you to have an 3:41 income of $10,000 a month in order to 3:44 qualify. So, what do most people do? 3:46 That’s right. They choose the 3:48 lowerpriced option. It allows them to 3:50 qualify with less income. It allows them 3:52 to qualify for much more home. And all 3:55 things being equal, they would be able 3:57 to increase their purchase price by 34%. 4:00 Which is a lot. Like that’s the 4:02 difference between you buying a $500,000 4:05 home and a $670,000 4:07 home. And even though, sure, with a 4:10 15-year mortgage, much less of your 4:12 payment is being eaten away by interest. 4:14 For most people, the 30-year option 4:16 offers more flexibility, it’s easier to 4:18 qualify for, they could get a bigger 4:20 house, they have more options, and so 4:22 they go for it. That’s why most people 4:23 think, “Oh, a 30-year mortgage is so 4:26 much less money every single month than 4:27 a 15-year mortgage, so a 50-year 4:30 mortgage must be even better, right?” 4:32 Well, that is where most people are 100% 4:35 wrong. So, let’s talk about the 50-year 4:37 mortgage. Over the weekend, Trump 4:39 tweeted a photo of President Roosevelt 4:41 on the left, who helped standardize the 4:43 30-year mortgage, while on the right, 4:45 Trump sits with a 50-year mortgage. 4:47 Initially, my first reaction was, why on 4:50 earth would this ever be a good idea? 4:52 Because it makes mathematically zero 4:55 sense whatsoever. But surprisingly, 4:57 people seem to be rather excited about 4:59 it. Like, we already have 144month car 5:02 loans and buy now pay later for Chipotle 5:04 burritos, so why not extend that to a 5:07 mortgage to hopefully lower your 5:09 payments? Even the developer PY 5:11 retweeted this by saying, “Thanks to 5:12 President Trump, we are indeed working 5:14 on the 50-year mortgage, a complete 5:17 gamecher, which for those unaware, 5:18 Pyomes is one of the largest national 5:21 developers in the United States, having 5:23 built nearly a million homes. So, if 5:25 they offer a 50-year mortgage term, 5:27 people seem to be in favor of this 5:29 because they think it’ll help them lower 5:31 their payments. They think they could 5:32 qualify for a bigger house, and they 5:35 think it’ll help keep the real estate 5:36 market strong. But mark my words, it 5:39 won’t. It’s a bad idea. Anyone who 5:41 understands math will agree with me. So, 5:43 as far as the actual numbers behind this 5:45 and what it actually means for anyone 5:47 who gets one, here’s what you came for. 5:49 Although, before we go into that, if 5:50 people are out there signing 50-year 5:52 mortgages just to save a few bucks every 5:54 month, you may as well save money in 5:57 other areas that just make more sense, 5:59 especially heading into the holidays. 6:01 That’s why it’s so important to find 6:02 ways to cut back without feeling like 6:04 you’re actually cutting back. And one of 6:06 the most overlooked options out there is 6:08 your cell phone bill. Like the average 6:10 person is spending over $100 a month, 6:13 but you could be paying nothing thanks 6:14 to Helium Mobile, who I’d like to thank 6:16 for sponsoring this video because 6:18 they’re a genuinely incredible service. 6:19 For those unaware, their plans start at 6:22 just $0 a month, as in totally free with 6:25 no contract, no credit card, and no 6:27 hidden fees. 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And 7:04 all you have to do to get started is 7:06 sign up for Helium Mobile down below in 7:08 the description and use the code Graham 7:10 to get $10 in cloud points for gift 7:12 cards just for signing up. Again, the 7:15 link is down below to start saving 7:16 today. Thank you so much. And now, let’s 7:18 get back to the video. All right. Now, 7:20 here’s the math that no one is telling 7:21 you when it comes to the 50-year 7:23 mortgage. Even though going from a 7:25 15-year to a 30-year mortgage will 7:27 improve your affordability by 34%, which 7:29 is a lot, going from a 30-year to a 7:32 50-year mortgage improves affordability 7:35 by less than 8%. Yes, you heard that 7:38 correctly. Getting a 50-year mortgage 7:39 will make almost no difference 7:40 whatsoever, except you’re going to be 7:42 taking on way more debt for your entire 7:45 life. And if you don’t believe me, 7:47 here’s some of the math. First of all, 7:49 it’s important to mention that overall 7:51 the longer of a loan term you get, the 7:53 higher the interest rate is going to be 7:55 because lenders want to be compensated 7:57 for tying up capital for longer. Like 7:59 right now, it’s 6.125% 8:01 if you want to get a 30-year fixed rate 8:03 mortgage, but it’s only 5.375% 8:06 if you want to get a 15-year. So, I 8:08 promise with a 50-year mortgage, you’ll 8:11 wind up paying closer to 7% because 8:13 there’s significantly more risk. This 8:15 means if you get a $500,000 loan at 6% 8:19 fixed for 30 years, your monthly payment 8:21 is going to be $3,000 a month. But if 8:23 you think you’re about to save a ton of 8:24 money, stretching out your payment to 50 8:26 years. Well, guess what? At a 7% 8:29 interest rate for 50 years, your monthly 8:32 payment is going to drop to, wait a 8:34 second, $3,8 8:36 a month. Wait, it actually gets more 8:38 expensive? Yes. In fact, even if the 8:41 interest rate is the exact same on a 8:43 50-year mortgage as it is on a 30-year 8:45 mortgage, which is mathematically 8:47 impossible, by the way, but just for the 8:49 sake of the argument, let’s just assume 8:51 that aliens have abducted everybody and 8:53 we live in an alternate universe where 8:55 that is the case, your monthly payment 8:57 would drop from $3,000 down to just 9:00 $2632 9:02 a month. To put that into perspective, 9:04 that’s basically the equivalent of you 9:06 saving 10% on your mortgage or being 9:08 able to qualify for a home that costs 9:10 10% more. That is it for nearly doubling 9:13 the time it takes to pay off the loan in 9:16 the first place. And like I said, the 9:17 realistic savings would be pretty much 9:19 non-existent because there is no way 9:21 that they could offer a 50-year mortgage 9:23 term at the same rate as a 30-year 9:25 mortgage term unless it’s subsidized by 9:28 the government or it’s just baked into 9:30 the purchase price. And if they do that, 9:32 we’re all going to end up paying for it 9:34 in the form of higher prices and 9:36 probably higher taxes. Not to mention, 9:38 there is another concern with all of 9:40 this, and that would be investors. 9:42 Here’s the part that nobody talks about. 9:44 30-year mortgages are only viable 9:46 because most people keep their home for 9:48 about 10 years, and then they sell their 9:50 home, the loan gets paid back, and then 9:52 they start the process over again. That 9:54 is why mortgage rates are so heavily 9:56 tied to the 10-year Treasury yield. 9:58 Essentially, the two are 9:59 interchangeable. So, when mortgages are 10:00 bundled together and sold on the 10:02 secondary market, it gives investors a 10:05 stable return that they could count on, 10:07 and it provides more liquidity back into 10:09 the markets immediately to go and issue 10:11 more loans. On the other hand, a 50-year 10:13 loan holds a massive risk to whoever 10:16 buys and holds onto that loan. Why? 10:19 Well, here’s the math. If you buy a 10:21 $550,000 home, you put 10% down and you 10:24 get a 50-year loan, and then you sell 10:26 your house 12 years later. Because most 10:29 of your mortgage payment is front-loaded 10:31 with interest, by the time you go and 10:33 sell it, you’ve paid off just $32,000 10:36 worth of principal. This means if your 10:38 home doesn’t meaningfully go up in value 10:40 and you sell for the same price that you 10:42 paid for it, subtract 6% for closing 10:45 costs, subtract what you have remaining 10:47 on your loan. And all of a sudden, 10:49 you’ve now got less than you put down to 10:53 buy the property, all for the risk of 10:55 owning a property in the first place. 10:57 Now, even though the reality of your 10:58 home being worth less 12 years from now 11:00 is unlikely, it does create a very 11:02 dangerous scenario where if the market 11:04 goes down by any amount, you’re quickly 11:07 going to be underwater on your loan. And 11:09 in the event you can’t get more than 11:10 what you paid for it, you’re quickly 11:12 going to be left with nothing to show 11:14 for it, even after holding your home for 11:17 more than a decade. This is why lenders 11:19 inherently need to charge more interest 11:21 upfront because the loan is riskier and 11:24 it’s riskier for the buyer to lose money 11:26 on the deal. In fact, it’s also a double 11:28 negative for banks because if they give 11:29 a 50-year loan and interest rates go 11:31 down, the buyer just refinances. But if 11:33 interest rates rise now, the bank is 11:36 stuck with a low yielding investment for 11:38 many, many, many decades, and they’re 11:41 going to lose a lot of money on that. 11:42 That’s why feasibly a 50-year mortgage 11:45 just doesn’t make any sense for anybody. 11:47 Not the banks, not the borrower, not the 11:50 investor. The reason a 15 to 30year 11:52 mortgage works so well is because that 11:54 increases affordability by 34%. But once 11:57 you go beyond 30 years, there are 11:59 diminishing returns. And the net benefit 12:01 for going from 30 to 50 years just isn’t 12:05 there. It’s not practical. Not to 12:07 mention, banks probably don’t want to 12:08 issue loans that you’re not going to be 12:10 alive for by the time you should be 12:13 paying it off. Unless, of course, it’s 12:15 subsidized for the government or baked 12:17 into the selling price, at which point 12:19 again we got bigger problems. Plus, on 12:21 top of all of that, by law, a qualified 12:23 mortgage is not allowed to exceed a 12:26 30-year term. These qualified mortgages 12:28 are very important because it gives the 12:30 lender recourse in the event the 12:32 borrower defaults on their loan. And 12:34 because those loans are less risky, 12:36 they’re able to charge less interest to 12:38 the borrower. On the other hand, a 12:39 non-qualified mortgage does not have 12:42 that shield and the liability falls back 12:44 on the bank in the event the borrower 12:46 stops paying. That’s why I’m saying 12:48 there’s no reasonable way that you can 12:49 offer a 50-year mortgage at the same 12:51 interest rate as a 30-year mortgage 12:53 without paying substantially higher 12:55 interest upfront. It just doesn’t make 12:58 any sense. And at that point, it 13:00 completely defeats the purpose to begin 13:02 with. Because if you pay more than like 13:05 10% higher than you would with a 13:06 30-year, you start paying more on the 50 13:08 than you would with the 30, even though 13:10 you’re reducing the payments because you 13:12 pay more interest. It doesn’t make any 13:14 sense. Like, if you want my take on 13:15 this, if this actually has any chance of 13:18 passing, it’s probably going to be a 13:20 very specific loan product issued most 13:23 likely by developers who could just bake 13:25 it into the higher purchase price. It is 13:28 going to be issued on a case-bycase 13:30 basis, and it’s going to require 13:32 completely changing housing laws to 13:34 enact mortgage protections on banks. Not 13:36 to mention, it would need to be 13:37 assumable by people who want to keep the 13:40 house in the family. Because otherwise, 13:42 you have people taking on 50-year loans 13:44 just so their kids could keep paying off 13:47 the loan and then eventually the kids 13:49 die and the grandkids hopefully inherit 13:51 a paidoff house a 100red years later. To 13:54 me, all of this is just a bit of a 13:56 gimmick. Like, it’s fun to think about. 13:58 It gets people talking a lot on Twitter, 14:01 but mathematically it makes no sense to 14:03 take this over a 30-year mortgage, and 14:06 there would have to be major hurdles to 14:07 overcome just to get this out there in 14:10 the market. Separate from that, I think, 14:12 in terms of actually making a difference 14:14 in the housing market. All we need to do 14:17 is unlock more inventory. And to do that 14:20 just requires really three things. 14:22 First, increase the capital gains 14:24 exclusion from $500,000 to a million 14:26 dollars for married couples and then 14:28 increase it every year with CPI. This 14:30 will incentivize way more sellers to 14:32 list their homes for sale. And that 14:34 would have been the inflationadjusted 14:36 amount anyway from the $500,000 that was 14:39 enacted back in the 1990s. Second, they 14:41 should also allow you to take your 14:42 existing mortgage with you and apply it 14:44 to the next home, assuming you’re 14:46 trading up on a primary residence. And 14:48 this would also unlock a lot of 14:50 lowerpriced inventory. And three, we 14:52 should allow people to write off up to a 14:54 million and a half of mortgage interest, 14:56 but only for new loans that are issued 14:58 after 2026. But beyond that, let me make 15:01 this very clear. A 50-year mortgage is a 15:04 very dumb idea. It mathematically 15:06 doesn’t make any sense to take. I think 15:09 it won’t even work. It’s not going to 15:11 make any difference for housing 15:12 affordability. And if people actually go 15:14 for it, we have a problem. Especially 15:17 when the average home buyer is 40 years 15:18 old. I guess they just pay for their 15:20 home until they’re 90. Great.