Last week, President Trump caused a media frenzy after he floated the idea that the government should back the creation of a 50-year fixed mortgage.
Many commenters, including some of Trump’s own supporters, hated the idea. They complained that it would result in Americans being in debt for their entire adult lives, essentially renting from a bank. They complained that this type of mortgage would explode the amount of interest homeowners would have to pay over the lifetime of their loans. They complained that borrowers would be stuck paying interest-only payments for many years and be prevented from actually paying down their principal and building equity in their homes.
“It will ultimately reward the banks, mortgage lenders, and home builders while people pay far more in interest over time and die before they ever pay off their home,” posted Rep. Marjorie Taylor Green (R-Ga.). “In debt forever, in debt for life!”
President Trump “is creating generational debt,” said Josh Johnson on The Daily Show. “They’re going to be fighting to get out of grandma’s will. Grandkids will be like, ‘I barely knew her!'” (Side note: Josh Johnson is very funny. I’m a fan.)
The uproar over the 50-year mortgage idea reached such a high pitch that apparently the White House was furious with the administration official who pitched President Trump the idea, according to reporting from Politico.
Sure, it won’t solve our housing affordability problem. But is a 50-year mortgage really such a crazy idea?
“It’s not quite as outlandish as it sounds,” says John Campbell, an economist at Harvard University.
“Honestly, I kind of think it’s a fine idea,” says Eric Zwick, an economist at The University of Chicago Booth School of Business. “It’s not obviously so different from a 30-year fixed mortgage.”
The 50 vs The 30
First of all, the reality is most homeowners ditch their mortgage well before its end date. Some refinance. Others move.
In America, unlike some other countries, including the UK, you can’t take your mortgage with you if you sell your house. So when people sell their house and move, they end their mortgages.
The typical American homeowner spends less than 12 years in their home, according to a Redfin analysis of the U.S. Census data. That’s actually high compared to recent history. Back in the early 2000s, Americans typically spent only about seven years in their houses.
“ Most people will not have that 50-year mortgage product for that length of time,” says Daryl Fairweather, the chief economist of Redfin. “I think in a world where this product exists, a lot of people might sign up for it initially and then try to refinance later.”
In other words, the 50-year mortgage would not be a 50-year trap. It would basically serve as another option on the menu for homebuyers looking to finance their homes. And, because you have longer to pay off the loan, it comes with the benefit of having somewhat lower monthly payments. Maybe that could help some secure their dream house or reap the benefits of investing in the housing market.
“I think affordability is a concern in the housing market,” Zwick says. “And one element is the down payment, but another element is the monthly payment. And a longer duration mortgage is gonna lower the monthly payment.”
And, sure, there are real drawbacks to this sort of financing, including especially a much higher interest bill over the life of the loan and an extended period where homeowners aren’t paying down their principal and building equity. But those same issues also arise with the 30-year fixed mortgage, albeit to a lesser degree.
And Americans apparently love the 30-year mortgage. More than 90% of American mortgage holders have one!
The American mortgage market is weird
The fact that so many American homeowners have long-term, fixed rate mortgages, and they’re able to basically refinance pretty easily whenever they want, makes the U.S. mortgage market pretty weird compared to most other countries.
We won’t get into the complicated history here (we might actually do a Planet Money episode on this history in the future). But, for now, we’ll say the 30-year mortgages date back to the Depression era. And they’re fundamentally a creature of government intervention. The government-sponsored enterprises Fannie Mae and Freddie Mac buy mortgages from private lenders, allowing them to offload (and socialize) the risks associated with lending large sums of money for decades at fixed interest rates.
Without this intervention, the 30-year mortgage would probably not be so ubiquitous. I mean, think about it. Would you want to lend someone hundreds of thousands of dollars for decades and freeze the amount they will pay you for providing them with that money? What if they lose their jobs or die? What if interest rates skyrocket and you can find much more favorable terms for lending out that money? And then, to boot, if interest rates fall, the borrower can just walk away from that loan and get a new mortgage at any time when economic conditions are more favorable to them? I mean, yikes. No thanks.
A long time ago, Planet Money interviewed financial journalist Bethany McLean about 30-year fixed mortgages, and she described them as “a financial Frankenstein’s monster” from the perspective of lenders.
Without an important role for the government in backing these loans, “I don’t think any rational bank would offer this product,” says David Berger, an economist at Duke University.
“ You need the public sector to play an important role for really long duration mortgages to be viable in the financial system,” says Joseph Gyourko, an economist at the University of Pennsylvania’s Wharton School of Business.
It helps explain why this sort of mortgage system is so rare in the world.
The Pros of long-term, fixed-rate mortgages
There are some clear benefits of the weird mortgage system we have in the United States. One is lower monthly payments because homebuyers can pay off their loans over 30 years. Another is homebuyers are given an incredible ability to freeze their housing costs in stone and then refinance when it suits them.
Several of the economists we spoke to had 30-year mortgages themselves, and they had refinanced when rates sank below 3 percent a few years ago. They were very nice people, but I hate them now. (I bought a house more recently and the mortgage rate is close to 7 percent).
Anyways, the ability to freeze rates and then refinance later if the opportunity arises is clearly a huge benefit to homebuyers. It offers predictability on your housing costs. And, especially nice, a fixed-rate mortgage basically shields you from inflation and its accompanying higher interest rates. Everything else may get more expensive, but your housing payment actually falls in real terms when there’s inflation!
The Cons of long-term, fixed-rate mortgages
That said, as we already alluded to, both 30-year and hypothetical 50-year mortgages come with costs: they tend to have higher interest rates than adjustable rate mortgages and you have a longer period upfront paying interest and not actually paying down your loan much.
But there’s more.
If the housing market gets dicey and prices start plummeting, having a large outstanding loan at a fixed interest rate can create serious problems. Gyourko, the economist at Wharton, says long-term, fixed-rate mortgages increase the probability that you can go underwater on your home, a situation where you owe more on your house than it’s worth.
“ The borrower on a really long duration loan — 30 or 50 — does not build equity very quickly at all,” Gyourko says. “ There’s a risk that if there’s a severe drop in house prices, you go underwater.”
Going underwater is a nightmare. If you sell, it means the money you get won’t cover your debt. It gets much harder to refinance, meaning you’re stuck with a higher interest rate than you could otherwise get in a situation where the housing market tanks.
If you have a fixed-interest rate and the housing market tanks, “your house price goes down and you’re kind of stuck,” says Berger, the economist at Duke. “No one is gonna lend to you when you’re underwater. If you had an adjustable rate, your rate would’ve just dropped automatically,” and maybe that would help you make your housing payments and not lose your house.
“And are you more likely or less likely to be laid off if house prices drop a lot? Answer: more likely,” Gyourko says. “So you run that risk of those two events coinciding, and then you’ve lost a huge amount of your personal wealth.”
Depending on the state of the economy, the direction of interest rates, and your financial circumstances, it might not make sense to fix your interest rate. Actually, that may be the case right now. Interest rates spiked in 2022 and 2023 and have already started to come down, and many expect them to go down further, especially if the economy enters a recession.
“ Right now, I think it does make more sense for people to get an adjustable rate mortgage,” Fairweather, the chief economist at Redfin, says.
Adjustable-rate mortgages typically start with lower interest rates than fixed rate mortgages. Fairweather says you can think about the choice to buy a long-term, fixed-rate mortgage instead of an adjustable rate mortgage as effectively paying extra for insurance against future interest rate hikes. And, just like the standard advice for buying any other kind of insurance, “you don’t really want to get insurance if you can afford to self-insure,” she says. In other words, if you think you could afford the possibility that interest rates spike in the near future, it probably makes sense to get an adjustable rate mortgage.
“ So if you get the adjustable rate mortgage, what I would advise is to make sure you have some room in your budget left over for when the mortgage rate resets potentially at a higher level so that you’re not hit with costs that you aren’t able to pay,” Fairweather says. “But if you could take that savings and you know, put it in your savings account, then you’ll probably end up a-okay with an adjustable rate mortgage and actually save money compared to the fixed rate.”
Fixed-rate mortgages may distort our economy
But there are other, economy-wide issues with having so many mortgage-holders with long-term fixed rates.
One is that the government involvement in the housing market that makes our system of widespread 30-year mortgages possible can occasionally result in big problems for taxpayers, especially if regulators aren’t vigilant in preventing shady loan practices. Just see what happened during the global financial crisis back in the late 2000s.
“The worst possible situation is what happened in the global financial crisis when Fannie and Freddie were basically insolvent, were put on the treasury’s balance sheet and to this day remain there,” Gyourko says.
Another problem with America’s weird system of ubiquitous fixed-rate mortgages is that it may weaken the Fed’s ability to juice the economy or lower inflation when needed (aka conduct monetary policy).
That’s because fixed-rate mortgage holders are shielded from interest rate changes. If everyone had an adjustable rate mortgage, the Fed could maybe more easily juice the economy by lowering people’s monthly payments, nudging them to spend more in the economy. That said, if interest rates go low enough, it will induce many American homeowners to refinance, lower their payments, and potentially goad them to increase their spending and boost the economy.
In inflationary times though, when the Fed needs to bring down spending in the economy, the Fed’s job may be tougher and more distortionary to the economy. If everyone were on adjustable rates, the Fed could just raise rates and, boom, homeowners would probably start spending less and inflation would come down. But most American homeowners are shielded from rate increases, so it’s new homebuyers — often younger people — who feel more of the pain. Some argue that’s unfair.
Speaking of unfairness, Harvard’s John Campbell points out that maximizing your personal wealth in our weird mortgage system relies on considerable financial literacy, and populations that are poorer and less educated tend to be less financially literate. So this system results in greater inequality.
“A lot of people don’t know when to refinance and they just don’t do it,” Campbell says. “And there’s some very troubling evidence that, in this country, black and Hispanic borrowers are much slower to refinance than white borrowers.” The result, he says, is they tend to pay higher interest rates.
There’s another problem with our system: lock in. This has been talked about in recent years. There are tons of homeowners out there who now have rock-bottom interest rates on their mortgages — like, ahem, many of the very financially literate economists I spoke to — and they’re reluctant to move.
Lock-in may be one reason why American home prices have been stubbornly high over the past few years, even as interest rates have spiked. Other countries, where adjustable rate mortgages are more the norm, have seen their housing prices dip a lot more in recent years.
“ I think that their housing markets are more reactive to their overall economies,” Fairweather says. “So in other places where there’s more adjustable rate mortgages, when interest rates go up, that means that homeowners have a reason to sell because their payments are going up. And if they can’t afford them or they don’t want to pay them, then they’ll put their homes on the market. In our housing market, that doesn’t happen. There is this unequal treatment between first time home buyers and existing homeowners. And it really benefits long-term homeowners.”
Even more, economists believe that the lock-in that fixed mortgages create is bad for the economy. Many people may be refusing jobs where they could be more productive because they don’t want to move.
The real fix for housing affordability
So, yeah, many of the problems identified with the 50-year mortgage idea are also present with the 30-year mortgage.
The real motivation for this idea is to enable more Americans to buy houses. With high prices and higher interest rates than a few years ago, many Americans are priced out.
The economists we spoke to all stressed that this new financial product will not solve the fundamental problem of housing affordability. To do that, we need to start building a lot more homes. Some even said that by juicing demand with this new financial product and not increasing supply, this proposal could actually make housing prices go higher, contributing to the problem.
“Proposals to help home buyers — whether it’s this 50-year mortgage or whether it’s Kamala Harris’s proposal in her presidential campaign to give money to first time homebuyers — the main beneficiaries are actually the people selling houses,” Campbell says. “Because given the supply, if you make it easier for buyers, they’re bidding against each other for the same supply. The price is gonna go up. The winner is gonna be the person selling.”
So, yeah, we need to build more homes. But, in that world, maybe a 50-year mortgage would have some benefits for some people. Of course, they will need to know the facts about this financial product and make sure it’s the right product for them.
Berger, the economist at Duke, recommends that the government invest more in helping Americans become more financially literate about mortgages and provide better information about alternative financial options to the 30-year mortgage. This stuff is complicated!
