REAL ESTATE
The 50-Year Mortgage ?!
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and several previous blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance, and the situation appears to be only getting worse, with an increasing number of defaults.
Over the past 17 years, since the Great Housing Crisis of 2008, ignited by sub-prime lending practices, more stringent requirements and regulations regarding lending were re-instituted to help protect the consumer. Strict guidelines regarding debt-to-income ratio, down payment percentage of equity, employment records and credit scores were all put in place again, to avoid unaffordable purchases.
Today, the average home is priced in the mid-400k range, the average mortgage exceeds $2,500 per month, and both property tax and home insurance continues to increase. At the same time, unemployment and inflation are both on the rise, which is a rare occurrence. Debt and credit card balances are also at all-time highs, with no end in sight. The percentage of “first-time” buyers making purchases is down to only 21%, and the average home buyer age has skyrocketed to 40 years old.
It is important to realize, especially for first-time buyers of a home, to understand that the loan for a mortgage is different than a loan for a car or education. Mortgage loans are amortized, meaning that the principal and interest are not set at fixed prices spread evenly throughout the loan. Beginning with the first payment, the principle paid monthly starts at the lowest amount, and increases slowly, while the interest starts at the highest amount, and decreases slowly. Building equity is a very long, slow, grind, with potential tax hikes, insurance increases, repairs, and system replacements further cutting into the true equity.
The average mortgage takes approximately 19 years (over half the loan period) to reach the point where the principal and interest monthly payment are about even. At the current 6% average mortgage interest rate, a $450k home would end up costing over $970k (if no additional “principal only” payments were made during the life of the loan), with over $570k in interest alone. Additionally, most defaults/foreclosures are associated with lower equity individuals, as there is no room to acquire additional loans (including home equity) to possibly save the property.
Presently, there are discussions regarding the allowance of 50-year mortgage loans, with lenders promoting lower monthly payments as incentive. Unless one has no other option to remain in their home, this is not suggested, as the property will ultimately cost a significant amount more in the end, based on the added interest, and the amortization schedule. In a 50-year mortgage, it takes approximately 39 years to reach the point where the principal and interest payments are even. At the current 6% average mortgage interest rate, a $450k home would end up costing over $1.4 million, with over $970k in interest alone! On the flip side, if a 15-year mortgage was affordable, the number would be considerably less at a little over $680k in total cost, and around $233k in interest.
In the current economic conditions, with the highest monthly layoff figures in several years in October, it is important to consider the “real” cost to any purchase, especially a home.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
