The 50-Year Mortgage Makes No Sense

I don’t understand why our government never creates simple solutions to real-life complex problems. Why do they always make things worse. Yes, I understand that simple solutions are not always a “fix all” for every problem in society, but sometimes a simple solution is the easiest and cheapest way to fix a problem rather than making it more complex and frankly, expensive.

Take interest rates, for example. Since interest rates have risen so high these last few years (nearly double what they were only 3 or 4 years ago), the mortgage rates have also risen with them to the point of creating stagnation in the market for new homes. Buyers need cheaper mortgage rates to purchase and sellers want to sell, but choose to stay in their homes because they’re only paying around 2.75-3.5% for their mortgages, which have become totally extinct for today’s buyers.

As a result of the higher interest rates, we now have a shortage of inventory of houses for sale, which drives up the purchase prices for new homes for the trove of buyers who can afford to buy whichever houses are for sale regardless of the interest rates.

So, the government threw out a possible solution, which they’re excited about, but is frankly absurd: they announced they will raise the mortgage terms from 30 years to 50 years! After I picked myself off the floor from laughing so hard, I sat down and figured out what everyone would save if their monthly payments were changed from a 30-year mortgage to a 50-year one. Turns out they might save a whopping $100 per month on a mortgage of $400K. Wow. But they’ll also be paying for an additional 20 years. Do the math.

I looked at this ridiculously nominal savings and thought to myself, “What meds are these people on down in Washington that they come up with these absurd solutions instead of looking for simple ones? The ones that are right in front of their faces but they’re too blind to see. Solutions that would go a long way toward solving a large part of this problem?”

I’m referring here to a simple change that would allow sellers to either offer their existing low interest mortgages to a new buyer by making the mortgage assumable. This would solve at least part of the slowdown in the housing market since buyers could utilize existing low mortgage rates on these mortgages in order to make their purchase more affordable. If necessary, they could take out an additional HELOC or Home Equity Loan for any extra funds they need above the amount of the assumable mortgage.

Fifty years ago, most mortgages were assumable, and when it came to the time when mortgages went up to 13% and 14%, many buyers took advantage of those assumable loans to get the lower rate advantage, which back then brought the rate down to 6.5% or 7% (which was a bargain back then).

The alternative option, which should also be offered, is to give the seller the option of taking his mortgage with him wherever he goes, meaning, if someone has a $400,000 mortgage at 3% and they want to take that mortgage with them by transferring it to their new house while holding onto the existing rate of 3%, which would be taken off the title of their old house and applied to the title of their new house.

Instead of the seller staying put because he has a low mortgage, he would be incentivized to sell his house and purchase a new one with the remains of his low interest mortgage, which he now places on the new house.

Utilizing existing low interest mortgages in these two fashions will both open up the market to new housing inventory as well as enable many new buyers to afford to purchase housing based on the assumable mortgages.

This option will save hundreds of dollars for buyers on their monthly mortgage payments as opposed to utilizing a 50-year mortgage when the interest rate stays high and creates only a small, insignificant savings on any mortgage a buyer might need in this high interest market. Again, it’s time the government utilized simple solutions to help buyers rather than complex solutions that help no one but the bankers. n

Anessa Cohen lives in Cedarhurst and is a NYS Licensed Real Estate Broker (Anessa V Cohen Realty) with over 20 years of experience offering full service residential, management and commercial real estate services. She can be reached at 516-569-5007. Readers are encouraged to send any questions or scenarios by email to [email protected].