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Let’s talk about this 50-year mortgage idea.
Over the weekend, Trump and Pulte floated the idea that the US might be working on 50-year mortgages as a new product for Americans trying to buy a house.
The concept of super-long mortgage amortizations is not new.
Sweden has been operating with 50 (or even longer!) amortization contracts on mortgages for a long time. The idea is that you service your interest rate costs, and tend to pass down the property to your kids.
The key variable to consider here is what the new mortgage rate will be.
For the sake of a simple discussion, let’s assume the 30-year and 50-year US mortgage rates would be the same.
The chart below shows what would happen to a US homebuyer using a 50-year mortgage (loan number 4):
- The monthly payment would drop from $3,694 to $3,270
- The total interest paid over the lifetime of the mortgage would increase from $730k to $1.36M
Of course, extending the amortization period and assuming the same mortgage rate equates to lower monthly payments.
But as you pay for 20 more years, your total tally of interest rate costs increases significantly.
The critics are mostly focusing on the last point.
But the time value of money works the other way around.
By extending the amortization period, you also save $400 per month in the example below.
What’s the assumed return on investment, compounded, of an additional $400/month invested in a standard balanced risk parity portfolio for an additional 20 years?
In general, with this step, we would hyper-financialize the economy further and tie US consumer wealth even more to house prices and the S&P 500.
Do you think this is a good or a bad thing?
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This article was originally published on The Macro Compass. Come join this vibrant community of macro investors, asset allocators and hedge funds - check out which subscription tier suits you the most using this link.