Opinion: Restoring the American Dream: How 40- and 50-Year Mortgages Can Revitalize Homeownership
The American dream of home ownership is disappearing for many as the gap between wages and home prices continues to widen. In the 1970s, house prices more closely matched income levels. Today, rising real estate costs – especially in high-cost areas – are pricing millions of Americans out of the housing market.
One possible solution? Extend the traditional 30-year mortgage to 40 or even 50 years. This could provide the financial flexibility needed to make homeownership feasible for those priced out of the current market.
California: a microcosm of the crisis
California illustrates the severity of the affordability crisis. As of May 2024, the median price of a single-family home in the state was $904,210, while the median household income is $91,551 (California Association of Realtors, US Census Bureau). To comfortably afford such a home, a household would need to earn $239,000 annually – more than 2.5 times the average income.
For families earning $91,551, a 30-year mortgage at 6% would require monthly payments of more than $5,400, which would eat up more than 70% of their income. However, a 40-year mortgage could lower the payment to about $4,849, and a 50-year mortgage to $4,564, making homeownership significantly more affordable for middle-income families.
Why are house prices so high?
Several factors have driven house prices to unsustainable levels:
- Low interest rates: A decade of historically low rates stimulated demand and caused prices to rise.
- Housing shortages: Limited supply, especially in desirable areas, creates intense competition and higher prices.
- Demographic shifts: Millennials, who are now reaching the age where they can purchase a home, have higher demand.
- Rising construction costs: Supply chain issues and labor shortages have driven up construction costs.
- Investor activity: Institutional investors purchasing single-family homes for rental have reduced inventory for individual buyers.
- Urban exodus: Post-pandemic shifts to suburban and rural living have driven up prices in these areas.
- Government policy: Programs such as mortgage interest deductions kept homes off the market, reducing supply (Urban Institute).
The same applies to mortgages with a term of 40 and 50 years
While the 30-year mortgage has been an American standard, it no longer provides sufficient affordability for many. Extending the term to 40 or 50 years offers several advantages:
- Lower monthly costs: Longer terms reduce monthly payments. For example, a 50-year mortgage on a $900,000 home can lower payments by $850 compared to a 30-year mortgage.
- Improved borrower qualifications: Lower payments make it easier for borrowers, especially in high-cost areas, to qualify for mortgages.
- Increased purchasing power: Lower monthly payments allow buyers to afford homes they might otherwise miss out on.
- Flexible payment options: Features like “Pick-a-Pay” offer payment flexibility. Borrowers can pay more during high-income months to lower interest rates and build equity faster.
In addition, international examples demonstrate the effectiveness of longer mortgage terms. Countries such as Japan and Britain have successfully implemented 40- and 50-year mortgages to address their own housing affordability challenges. In Japan, these longer-term loans help families secure homes in expensive urban areas, while in Britain, 40-year mortgages have become a standard offering (OECD).
Removing concerns about interest rate and equity growth
Critics argue that longer mortgage terms lead to higher interest payments and slower stock growth. While these concerns are valid, flexible payment options can mitigate the downsides. Borrowers can choose to pay more where possible, reducing the long-term cost of the loan. More importantly, the affordability of lower monthly payments can make the difference between owning a home and getting stuck on rent.
A modern solution for an evolving market
The American dream of homeownership is in jeopardy, but adopting longer mortgage terms could restore that dream for millions of middle-class Americans. By extending mortgage terms and embracing flexible payment options, we can ensure that homeownership remains attainable for generations to come.
Darrin Seppinni is a mortgage professional, author and real estate agent in California.
This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners.
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