It is widely recognized that the issue of affordable housing is a pressing concern for many Americans today. This observation isn't meant to assign blame or point fingers (although I do have strong views on the subject, which I'll save for another time).
With the election season underway, topics like the economy, inflation, and housing affordability are at the forefront for both political parties. I won't delve into the proposed policies or share my perspectives on the candidates here, but you can explore those discussions elsewhere.
One of the more interesting ideas I’ve recently encountered, however, comes from an op-ed by John Hope Bryant, CEO of Operation Hope and former advisor to Barack Obama, published on CNBC last month. Bryant suggested that a 40-year mortgage could serve as a short-term solution to America's housing affordability challenges.
Initially, I disagreed with the proposal. In fact, the original title of this article was “A 40-Year Mortgage Would Be Harmful to Homebuyers.” However, after analyzing the data and experimenting with amortization schedules, I found there may be financial advantages that are worth considering.
John Hope Bryant’s Proposal for a 40-Year Mortgage
Bryant's proposition rests on several core ideas:
Subsidizing interest rates between 3.5% and 4.5% for first-time homebuyers who complete financial literacy training.
Setting subsidy limits at $350,000 for rural areas and $1 million for urban settings.
No age restrictions for the buyers.
This concept of longer mortgage terms isn’t new. Earlier this year, real estate expert Grant Cardone predicted that we might eventually see mortgages extending 50 or even 100 years.
By extending payments over a longer period, the idea is that monthly payments will be reduced, enabling more buyers to afford homes that would otherwise be out of reach.
Examining the Numbers
At first glance, the numbers are appealing. A 40-year mortgage could provide a more accessible entry point into homeownership and enable buyers to accumulate equity over time.
I want to highlight a point from Bryant's CNBC article:
“Critics might argue that a longer mortgage increases total interest payments, but the advantages of affordability and access outweigh this drawback. For many, the alternative is renting indefinitely, which builds no equity and leaves families vulnerable to rising rents and economic displacement. A 40-year mortgage gives more people the opportunity to build equity sooner, paving the way for long-term financial stability.”
Initially, I intended to challenge this assertion, but after running the numbers, I found three reasons why this plan could have merit.
1. Lower Monthly Payments
Bryant's primary argument is that a longer mortgage with a lower rate would result in more affordable monthly payments. Using a mortgage calculator, I confirmed this claim. For illustration, I utilized the national median home price, property taxes, and insurance costs to estimate the overall payment for a homeowner.
The longer loan term and reduced interest rate could result in a savings of approximately $585 per month. Over a year, this would amount to more than $7,000 saved in monthly payments—a significant advantage for buyers.
2. Reduced Interest Payments Over Time
Contrary to what I initially thought, the total interest paid over the life of the loan could actually be lower with a 40-year mortgage. Here's how the numbers break down:
30-year mortgage: $406,823.67 in total interest.
40-year mortgage: $353,343.76 in total interest.
Even though the loan period is extended, the 40-year mortgage buyer would pay $53,479.91 less in interest, thanks to the lower interest rate. While the calculation might vary depending on the specifics of the loan, there are scenarios where the 40-year mortgage could actually result in lower overall costs.
3. Mixed Results in Equity Growth
Bryant’s argument also focuses on equity growth with a 40-year mortgage. This point, however, depends on various factors and offers a mixed perspective.
Not all first-time buyers find their “forever home” with their initial purchase. Many Americans move frequently throughout their lives. For the sake of argument, let’s assume a buyer remains in their home for 10 years. Using a conservative 2% annual appreciation rate, a 30-year mortgage generates about $13,543 more in equity at the 10-year mark compared to a 40-year mortgage.
However, when factoring in monthly mortgage payments and initial down payment, the 40-year mortgage buyer actually has a higher return on investment at month 308 compared to the 30-year mortgage buyer, who reaches the same point seven years later.
The Supply-and-Demand Dilemma
Despite the favorable financial projections, the principle of supply and demand should not be overlooked. Introducing more buyers into a market with limited housing supply could increase competition, ultimately driving up home prices.
This situation could lead to buyers overextending themselves or waiving contingencies, especially first-time homebuyers who might struggle to resist the fear of missing out (FOMO). Lenders, too, could impose restrictions, such as requiring smaller down payments, which might slightly diminish the benefits of the lower monthly payments by introducing private mortgage insurance (PMI).
Conclusion
While my arguments are based on basic assumptions and simplified calculations, the data suggests that the 40-year mortgage may offer significant advantages for certain homebuyers, especially those seeking lower monthly payments and long-term affordability.
That said, market dynamics and potential unintended consequences, like increased competition and rising home prices, could offset some of these benefits. Ultimately, the 40-year mortgage may be a viable tool for specific buyers, but its effectiveness depends on individual strategies and goals.
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