November 19, 2025 – Recently, there has been a lot of chatter about a policy proposal: the 50-Year Mortgage. The proposal received significant pushback from all corners of society. Almost the entire political spectrum agreed that this was a bad idea. It’s rare these days that everyone agrees on something. So, I’ve been sitting back and watching the public outrage unfold. Oh, how terrible and irresponsible this is! You’re paying too much in interest over the life of the loan. You’re paying more in interest than the total value of the loan. You’ll still have a mortgage when you’re 90! Instead of passing wealth to your heirs, you only pass on a mortgage. The horror! For the record, I’m not a big fan of a 50-year mortgage. However, most reasons presented are not particularly convincing. Let’s take a look…
Update: I was on Paula Pant’s Afford Anything podcast to debate the 50-year mortgage. Please check it out: Should you get a 50-Year Mortgage? Also on YouTube!
Most arguments against the 50-year mortgage are unconvincing
The public outcry over how crazy the idea of a 50-mortgage is came from all corners, and the lame reasons put forward fall into multiple categories. Here are some:
“If you can’t afford a home with a 30-year mortgage, you probably shouldn’t buy one with a 50-year mortgage either.”
This is a true statement. If you make $3,000 a month and the 50-year mortgage reduces your mortgage payment from, say, $2,800 to $2,500, then you shouldn’t buy that home. Share a place with roommates or stay in your mom’s basement a little longer and build up your savings and earnings potential. But the argument is still weak. For example, if you make $20,000 a month, you can likely afford both mortgages. In that case, the 50-year mortgage doesn’t solve the problem of whether you can afford to buy a home. But it certainly gives you more options. You may consider allocating the extra $300 to a more suitable purpose. Maybe put them into an equity index fund or your business. It all depends on the interest rate that a 50-year mortgage charges. If you could get the same or only slightly higher interest rate on the 50-year mortgage, it may make sense. It’s also possible that someone could already afford a home with a 30-year loan, but the budget felt a little tight, and they were undecided. But the 50-year mortgage put them over the finish line. Good for them, and who am I to wag my finger and tell them they should remain renters for life?
“You will never be able to pay down your mortgage.”
I’ve heard this complaint and other overly dramatic and histrionic sob stories about how retired people could become indentured servants to the evil US financial system, all because of a 50-year mortgage. My reply to them: Have you been living under a rock for the last 20 years? We don’t live in your grandparents’ 1950s world anymore, where people got a mortgage at age 30 and diligently paid it down over the subsequent 30 years. It became fashionable to use your home equity as a piggy bank in the 2000s, which didn’t work out so well during the Global Financial Crisis. And that painful experience is already all but forgotten. With 30-year mortgage rates around 6% today, cash-out refis are still cheaper than credit card interest rates at 20%. Everybody and their uncle refinanced in early 2022. Even in today’s world, many borrowers obtain new 30-year mortgages at the age of 50 and beyond, where projected payments extend deep into their retirement years. What’s the difference between a 30-year-old getting a 50-year mortgage and a 50-year-old getting a 30-year mortgage? There is none: they are both debtors until they are 80. The difference between the 1950s and today is that hardly anybody pays down a mortgage from year 1 to year 30. Most mortgages are paid off early and replaced with new ones, often triggered by moving, job changes, retirement, divorce, or other similar events.
Some people may object now: “Karsten, aren’t you a great proponent of being mortgage-free in retirement?” Yes, I am. See my safe withdrawal series, Part 21: “Why we will not have a mortgage in early retirement” and Part 57: “Accounting for Homeownership in (Early) Retirement.” I certainly practice what I preach, so I am now mortgage-free in retirement. How did I do that? I obtained my last mortgage in 2013. And by 2018, I was mortgage-free. So, the unimaginative folks might think I got a 5-year mortgage and paid that down, right? Wrong. I had a 30-year mortgage with a substantial balance in 2018. However, I sold my place in California and bought a more affordable one in Washington State, all cash. So, my 30-year mortgage didn’t keep me from becoming debt-free in retirement. A 50-year mortgage, if it had been available in 2013, would have had almost the same final balance in 2018, and I would have been in roughly the same place, with slightly less cash after the home sale but a somewhat larger equity index fund position. Maybe I would have preferred the 50-year mortgage back in 2013. However, there wasn’t one, and I couldn’t do the math to compare the two. I’m sure, though, that a 50-year mortgage would not have made me a lifelong debt slave.
To the people who claim that we should protect naive individuals from borrowing themselves into a life of indebtedness, I say, thank you, but we don’t need your help. In the U.S., everyone already has the tools to ruin their finances. However, we also have the tools to thrive here if we apply them properly and responsibly. I prefer that over the nanny state you envision.
“You will leave a pile of debt to your heirs.”
Related to the previous point, but still a slightly different angle. Patrick Boyle, who’s usually quite insightful (one of the few YouTube channels I follow and recommend on my Links Page), made this irrational appeal to emotions in his recent YouTube video (at the 1:56 mark). The truth is that people will still leave a house, albeit with a slightly smaller home equity to their heirs. How much smaller is that home equity? Imagine you got a $500,000 mortgage for a $625,000 home. Borrower 1 obtains a 30-year mortgage at 6% ($2,997.75 monthly payment), while Borrower 2 secures a 50-year mortgage at 6.25% ($2,724.86 monthly payment). Imagine both borrowers die after 30 years. Borrower 1 leaves a house free and clear, which is likely still worth approximately $625,000 in CPI-adjusted dollars. Borrower 2 still had a $372,795 mortgage balance. That sounds dramatic, but remember that it’s a nominal balance in future dollars. If we apply a 2.25% CPI expectation over the next 30 years (equal to the 30-year TIPS-implied inflation rate), the real, CPI-adjusted mortgage balance is only $191,236. Therefore, the heirs will still inherit a substantial net amount, representing almost 70% of the home’s value.
Additionally, Borrower 2 had a $273 lower mortgage payment, so it’s conceivable that they might have put that money to good use, such as in savings and investments, or withdrawn less from their investment portfolio. Either way, that would imply leaving a potentially larger pile of financial assets, all else being equal. So, the total inheritance may not be too different for the two borrowers.
“The 50-year mortgage will have a substantially higher interest rate than a 30-year mortgage.”
Since we don’t currently have a 50-year mortgage, all the discussion and the pros and cons of the 50-year versus the 30-year mortgage are moot because we have no sense of what the rate differential between the two products may be. That doesn’t prevent the 50-year haters from coming up with estimates, one more unhinged than the other. For example, Patrick Boyle claims in a recent YouTube video (at the 8:24 mark) that “analysts” estimated a 75-100bps gap. He didn’t quote any analyst by name. Perhaps that mystery analyst simply linearly interpolated the current ~75bps gap between the 15- and 30-year mortgage rates, i.e., 5bps per year, to a 100bps additional spread for the 20 extra years in the 50-year mortgage. But finance is rarely exactly linear, as any analyst with better-than-elementary-school math skills will know. If we apply the 75bps gap between 15 and 30 years and 100bps between 30 and 50 years, so for example, 5.25%, 6.00%, and 7.00% for the 15, 30, and 50-year mortgages, respectively, we’d get monthly payments for a $500,000 loan of:
- $4,019.39 for the 15-year mortgage
- $2,997.75 for the 30-year mortgage
- $3,008.44 for the 50-year mortgage
Huh? How can that be? You pay $10.69 more per month for the 50-year mortgage, even during the first 30 years, not to mention the $3,008.44 during years 31 to 50. No borrower would go for that. Although lenders would love that deal, because if you examine the incremental cash flows between the two loans, every single month would be positive. That amounts to an infinite internal rate of return (IRR) for moving from the 30-year to the 50-year loan.
So, what kind of term premium do I find realistic for a 50-year vs. a 30-year mortgage? If the 50-year mortgage ever became as mainstream as the 30-year mortgage, i.e., there is an active secondary market, then I’d expect a term premium, purely based on term structure risk factors, somewhere around 20-25bps. That’s vastly below the 75-100 bps that Partick Boil’s analyst estimated. It’s also below the 50bps that some other financial influencers used, like Paula Pant in a recent tweet and White Coat Investor/Dr. Jim Dahle. Where did I get the 20-25bps number? I reach that estimate in multiple ways:
1: Corporate Bond Term Spreads
Unbeknownst to most people, including Patrick Boyle’s fixed-income analyst, there are corporate bonds with extremely long maturities that extend well into the latter part of this century and some even into the next. So, we could certainly try to gauge how a 20-year longer time to maturity is handled in the corporate bond market. I researched a few corporate bonds that shared similar bond parameters (i.e., the same issuer, similar coupons, call provisions, sinking fund protection, etc.). Here they are, see the table below. I found bonds issued by Alphabet (Google) and Meta (Facebook) with maturities in 2045 and 2065, so 20 years apart. I also found two Union Pacific bonds with maturities in 2055 and 2072. Of course, you might say that the Google and Facebook bonds have only 20- and 40-year terms, but note that corporate bonds have no amortization. Therefore, the final payment includes a large lump sum (principal repayment), whereas a mortgage spreads the principal repayment over the entire mortgage term. From a purely financial and mathematical perspective, despite shorter maturities, the duration of a 20-year corporate bond is likely to exceed that of a 30-year mortgage, and the duration of a 40-year corporate bond is likely to exceed that of a 50-year mortgage. I will provide more data below. However, just to be sure, I also included the Union Pacific bonds, which have a first maturity of precisely 30 years and the other of almost 50 years (February 2072).
So, how much extra yield do these corporate bonds pay per additional year of maturity? About 0.010% (Google), 0.013% (Facebook), and 0.007% (Union Pacific). On average, that’s approximately 0.01% per year of maturity, or 20 basis points for 20 years of extra maturity. Not 50bps, and certainly not 75-100bps for an extra 20 years of maturity.
We can also express the additional yield the bond market demands for each additional year of bond duration. Those slopes would be 0.048% for Google, 0.076% for Meta, and 0.068% for Union Pacific. That’s an average of 0.064% per year of duration. If we assume that a 50-year mortgage has about three years more bond duration than a 30-year mortgage (more on those statistics below, bear with me here), then those three extra years would demand about 19 basis points more yield in the 50-year mortgage—almost the exact estimate as with the plain maturity slope.
2: Simple IRR calculations
Let’s calculate some statistics for 50-year mortgages with different interest rate spreads compared to those of 30-year mortgages. I start with a 6% rate on the 30-year and then calculate the 50-year stats with rates between 6% and 7% in 0.125% steps. By definition, the x% 50-year mortgage has an x% IRR. However, we can also calculate the incremental cash flow between the 50-year cash flow and the 30-year mortgage cash flow. Why is that a useful stat? Both the borrower and lender can determine if that incremental cash flow has an attractive enough IRR. If borrowers believe the IRR is low enough to justify leveraging alternative investments, such as stocks, real estate, or business ventures, they may move from a 30-year to a 50-year term; free up cash flow initially and pay back later. If lenders determine that extending more credit early on through lower mortgage payments, in exchange for larger return payments later on, is worth it, and the IRR of those incremental flows is high enough, they will provide that credit. The market will then match supply and demand.
What I find intriguing about the “incremental IRR” is that it goes up much faster than one-for-one with the term spread. For example, a mere 0.25% extra yield on the 50-year mortgage implies an incremental IRR of 7.20%, a full 120bps higher than the 30-year mortgage. Ultimately, the IRR will approach infinity, somewhere between 6.75% and 7.00%.
Also, note that the duration of the 50-year mortgage is only marginally higher than that of the 30-year mortgage: 13.71 for the 6.25% 50-year mortgage vs. 10.73 for the 6.00% 30-year mortgage, a difference of less than three years. Returning to the mortgage vs. corporate bond comparison, the 40-year corporate bonds from Alphabet and Facebook have higher durations than the 50-year mortgage. That’s because mortgages with amortization don’t require a large lump-sum payment at the end.
3: More advanced IRR calculations
If we take into account that in today’s world, hardly anybody holds a mortgage until maturity, the need to squeeze that term spread becomes even more apparent. Some homeowners prepay their mortgage within a few years through a refinance. More than half of borrowers prepay their mortgages within 10 years simply because they move to a different home. I can’t imagine more than 10% of borrowers carrying a 50-year mortgage to maturity. Let’s see how the incremental IRR between the 50-year and 30-year mortgages changes when we allow prepayments. Let’s look at prepayments at 2 years (e.g., a refinance) and 10 years (e.g., moving somewhere else). Your IRR conditional on prepaying, i.e., the implicit interest rate you pay for lower initial mortgage payments, is 37.89% and 11.66%, respectively, which seems insanely high. Unless you have some extremely profitable investment opportunities. Even if you calculate probability-weighted cash flows (50% probability for the 2Y scenario, 40% for the 10Y scenario, and 10% holding to maturity), the IRR is now 10.13%. Note that the same is true for the 30-year vs. 15-year comparison. Very high incremental IRRs unless you hold the 30-year mortgage to maturity. So, long story short, even with a minimal term premium of 25bps, you get incremental stats in line with what we observe with the much larger 75bps term spread between the 30-year and 15-year mortgage. Fixed-income math is very non-linear!
Summary: Estimated term premium
With all that information, I seriously doubt that a 75-100bps term premium would be required to entice lenders to supply 50-year mortgages. Even 50bps would be excessive. The more likely scenario would be a term premium of around 20-25bps annually. The reason we need a term premium to be much lower when going from 30 to 50-year maturities is that the incremental IRR is much more responsive to the term premium than between the 30-year and 15-year mortgage, where 75bps seemed entirely rational. Finance is often a highly non-linear affair. If everything were linear and straightforward in finance, where essentially sixth-graders could do the math, I wouldn’t have made so much money between 2000 and 2018 while working in the industry.
“With a 50-year mortgage, most of your payments will go to pay interest.”
This is obviously the most straightforward argument to shoot down. There is nothing troublesome per se when paying more in interest over a longer-term loan. The same is true for 30-year mortgages over 15-year mortgages. Or 15-year mortgages over 10-year mortgages. If you are bothered by paying interest, then pay cash for everything. However, paying interest is a fact of life, and amortization math implies that a longer term means more of your payments go toward interest. Yes, you pay more over time, but the net present value of our mortgage is still the loan amount when discounted at the annual percentage rate (APR). There is nothing sinister about that. There is no magic line we cross when the total interest payments exceed the loan amount or even 2x the loan amount. There are some corporate bonds with maturity dates in 2121 (not a typo: 96 years from now), and the interest payment-to-principal ratio would be insane. More than 80% of all the payments are interest, and less than 20% is the principal paydown. However, locking in a 4.1% interest rate for 100 years, as Norfolk Southern did in 2021 (CUSIP 655844CJ5), turned out to be a savvy move.
“You build equity too slowly.”
Here is another junk stat that Patrick Boyle used in his YouTube video (around the 8:51 mark). He points out that after 10 years, you haven’t built much equity with a 50-year mortgage. Here’s my version of his chart; see below. With the 30-year mortgage, you paid down over $80,000 of the $500,000 loan. With the 50-year mortgage, the amount is about $20,000. Shocker! (side note: I am unable to replicate Patrick’s chart at the 9:13 mark with the roughly 6:1 ratio in principal paydown, certainly not for a 6.4% interest rate that he claims he’s used, or any other reasonable interest rate. Apparently, he made an error in his calculations. Maybe he relied on the same “analyst” that butchered the interest spread calculations.)
But this chart is misleading. CPI inflation also erodes the mortgage balance. In fact, in the first few years, the CPI effect is much larger than your principal payments. For example, if I transform the nominal mortgage balance of the two different mortgages after 10 years of an assumed/expected 2.25% average annual inflation, then the 30-year versus 50-year comparison no longer looks so lopsided; see the chart below. Even with the 50-year mortgage, you’ve “paid off” about 23% of the initial loan balance, compared to about 33% in the case of the 30-year loan, subject to the uncertainty around realized CPI inflation, of course.
Comparisons with the Great Depression
A century ago, before the 30-year fixed rate became the standard, borrowers had access to primarily 10-year interest-only mortgages. After 10 years, you’d owe the balloon payment equal to the entire loan balance. That was a recipe for disaster in the Great Depression because credit dried up, and folks couldn’t refinance into new balloon mortgages. However, the world of the 2020s is vastly different from that of the 1930s, in at least three dimensions. Today we have…
- Better monetary policy. In today’s world, the Federal Reserve will flood the financial system with liquidity when faced with a crisis, as we saw during the Dot-Com bust and the Global Financial Crisis. And during the pandemic, even before obvious signs of financial stress, out of an abundance of caution. In contrast, the 1930s Federal Reserve was mainly ambivalent to the financial woes and thus contributed to the tight monetary conditions.
- Relatively stable and predictable inflation. Today we have inflation around 2-3%, with some slight volatility. That was not the case in the 1930s and before. Average inflation rates may have been low, but the monthly and annual fluctuations around that mean were insane, about five times today’s volatility. If you took out a zero-amortization loan back then, the real value of that loan ten years later could be anything. The inflation-adjusted balloon payment after 10 years would have been worth anywhere between 57% less than the initial loan amount (worst-case for the bank) and 34% more than the initial amount (worst-case for the borrower).
- Better secondary mortgage markets. Today, banks can shift the mortgage risk to a well-functioning secondary market. True, that doesn’t eliminate the risk; it just shifts the responsibility to someone else if something goes wrong (think 2008!). However, at least the risk is on the books of investors who are better equipped to deal with it, while banks have a clean(er) balance sheet and can keep issuing more mortgages during economic crisis times. That wasn’t the case in the 1930s. Everything froze, we had numerous bank runs, and the rest is history.
So, when people warn about low-amortization loans invoking the Great Depression, I just have to roll my eyes. Today’s economy and financial infrastructure are significantly more resilient than they were in the 1930s. In 2007, we made Ben Bernanke the Fed chairman. He’s one of the premier economic scholars on the history of the Great Depression. He won the Nobel Prize in Economics for that. He examined what went wrong and how badly the Fed messed up back then to ensure we don’t repeat those mistakes. And the subsequent FOMC chairs all followed that same philosophy. So, please spare me the Great Depression comparisons!
However, there are valid reasons why the 50-year mortgage is not a panacea, which brings me to the next section…
Valid reasons to be suspicious about the 50-year mortgage
The mortgage payment is not the most significant hurdle for new home buyers. Coming up with the down payment is.
An additional $200-$300 to pad your mortgage budget is not a significant hurdle. Get a side hustle. Drive for DoorDash or Uber in your spare time. The opportunities are endless. Especially in the FIRE community, we should be experts in side hustles. Coming up with the down payment, which is usually in the high five figures or even six figures, is not something that can be done quickly with a few extra weekend shifts. Especially young first-time homebuyers will find it hard to scrape together a down payment when still dealing with expensive rents and student loan repayments. In competitive markets, sellers don’t even want to sell to you unless you have at least a 20% payment or, even better, an all-cash offer. Therefore, the 50-year mortgage will not be a panacea for housing affordability.
Then again, my point overlooks a very intriguing life principle: the power of minor, marginal improvements. If you can find just 100 small ways, each providing a 1% improvement, then the cumulative effect would be 100% with linear or 170% with compounding impacts. However, the folks who scream “that effect is too small to matter” would dismiss each of these small effects and never improve their lives. So, even if the mortgage payment is not the largest contributor to the affordability crisis, we can still explore ways to lower this one (small) constraint.
This new mortgage product would not be as established as the 30-year mortgage.
Because the 30-year fixed mortgage is the bellwether mortgage product, there is massive demand for 30-year mortgage-backed securities (MBS). We possess all the necessary infrastructure, along with decades of experience and research. The institutions that hold these mortgages and packaged products have all the tools to measure and hedge the duration and convexity risk. A 50-year mortgage is new territory: there are no 50-year Treasury bonds, 50-year Treasury futures contracts, or STRIPS (Separate Trading of Registered Interest and Principal of Securities) reaching that far. We don’t know if there is any lender appetite for the 50-year equivalent. Although I wouldn’t be surprised if today’s sovereign wealth funds, pension funds, and endowments would invest in longer-term securities to lock in the current higher interest rates. However, it’s unclear whether the mortgage rates can be as competitive as those in the 30-year market. At least not initially. The concern is that the 50-year mortgage will suffer from a chicken-and-egg problem: Since there is no experience initially, the mortgages would demand too much of a risk premium. Since nobody wants to get a mortgage at such high rates, we will never acquire that data. Even if we find a lot of borrowers who demand 50-year mortgages, there could be an adverse selection problem, i.e., only the most irresponsible borrowers opt for the 50-year mortgage, resulting in a pool of borrowers with the worst credit risk.
The politics!
No president can create a 50-year mortgage by presidential fiat. A longer mortgage duration would necessitate changes to various banking regulations. Those require congressional approval, such as changes to laws like the Dodd-Frank Act. In today’s political environment, I doubt that those will go through anytime soon, even if the 50-year mortgage was the most terrific idea in financial engineering ever, which it isn’t!
You’ll likely refinance the mortgage within five years!
Note that this is not an argument against the 50-year mortgage per se. It’s just an argument against getting a 50-year mortgage today. That’s because the Federal Reserve is currently in a rate-cutting mode. Clearly, there is some uncertainty about the December rate cut; however, the general direction remains downward. It is likely that we’ll experience another economic downturn over the next few years, accompanied by even lower interest rates, although probably not as low as those in the 2010s and early 2020s. Thus, there is no reason to lock in a 50-year mortgage now and voluntarily pay higher rates when you will likely refinance again later. Just look at the IRR stats of the 50/30 incremental cash flows above. So, if you are in the lucky situation where you can afford both the 30-year and the 50-year mortgage, you might be better off still going for the 30-year mortgage for now. Or even better, go for the 15-year mortgage now if you can afford the payments. But a 50-year option would be ideal if we find ourselves with rock-bottom mortgage rates again in the future.
The housing market imbalance is due to a shortage of housing supply, not a lack of financing schemes!
Proposing new financing gimmicks, such as a 50-year mortgage, is essentially equivalent to putting a Band-Aid on a ruptured artery. It doesn’t address the underlying problem. We lack an adequate housing supply, particularly in the most desirable, high-density urban areas with the most attractive employment opportunities. There is simply limited space in NYC, San Francisco, Seattle, and other cities. Crazy zoning laws, red tape, the Not-In-My-Backyard (NIMBY) attitude, rent control, and other factors all hinder new investment in rental and owner-occupied housing.
And again, I don’t want to make the same mistake I lamented above: dismissing one slight 1% improvement because the effect is not that significant. However, my concern is that by lowering the monthly mortgage payments while still ignoring and maintaining the supply constraints, we may not actually help new buyers, but rather drive home prices up even further. This might become another wealth transfer to already affluent individuals who own real estate—akin to a reverse Robin Hood, taking from the young and poor and giving to the old and rich.
How radical is an interest-only mortgage?
If lowering the monthly payments is your goal, why not consider something even more extreme: an interest-only mortgage!? Then we could just keep the maturity at 30 years. I mean, if the Federal Government can issue 30-year (non-amortizing, no-prepayment) bonds, why should households be constrained to 30-year amortizing mortgages? Shouldn’t responsible Americans have at least the same financial options as an entity that is famously irresponsible and financially inept? Most corporations issue bonds. Actually, the corporate bond would be a better analogy because many corporate bonds also have a prepayment option (“call provision”), analogous to the mortgage prepayment option. So, why should private borrowers be excluded from interest-only deals when everyone else is welcome at the table? Especially with low, stable inflation (see the chart above), I wouldn’t be too worried about the lack of amortization. CPI inflation will erode a significant portion of the real mortgage balance over time.
Of course, interest-only loans already exist, but they remain a relatively niche/exotic product. Typically, the interest-only period lasts only 10 years, after which amortization begins, resulting in a significant increase in monthly payments to repay the loan over the remaining 20 years. If you want to lower your monthly payment, consider exploring this type of mortgage and reassess the situation after 10 years. Very likely, your income increased, and you may bite the bullet and start paying down the balance. If you prefer the interest-only feature, consider refinancing into a new interest-only loan, although this comes with the risk of a new and potentially higher interest rate.
Borrowers who have sizable financial assets in taxable accounts may consider a loan against their portfolio. One drawback is that these are often variable-rate loans, so it’s harder to lock in a fixed interest rate. In most cases, margin loans are more expensive than mortgages, although Interactive Brokers offers some attractive margin rates, currently around 4.93% for a $1,000,000 loan (for IBKR Pro accounts), as of November 15. That’s better than a 30-year mortgage, and you can plan your principal payback on your own schedule.
The best option with even lower rates is the box spread trade, which I previously featured on my blog (Low-Cost Leverage: The “Box Spread” Trade). You can use this trade to borrow or lend at a rate usually about 20-30bps above the comparable T-Bill or Treasury Bond with the same maturity. Another advantage is that the interest expense comes in the form of a Section 1256 loss, which is split into 60% long-term capital losses and 40% short-term capital losses. These losses can always offset ordinary income up to $3,000 p.a., or your other existing capital gains from, say, options trading. I’m retired now with a substantial financial net worth. If I ever need to borrow again, either as a bridge loan or to purchase a more expensive house, I’d certainly use the box trade route. There is no mortgage application, no inspection, no paperwork, and I can use the financing cost to offset my trading income. And you can even lock in longer-term loans. Currently, the furthest box spread expiration with CBOE SPX options is December 2030, which is over five years away, and the rate is approximately 4.30% per annum, according to Boxtrades.com.
Conclusion
The 50-year mortgage idea is likely dead on arrival. And good riddance, because it likely wouldn’t alleviate the housing affordability crisis much today. But many concerns posted in the personal finance world stem from flawed reasoning. Some of the arguments against the 50-year mortgage are due to today’s specific situation, i.e., high interest rates and low expected returns elsewhere. There is nothing wrong with slower amortization if you are responsible with your finances. In the future and under the right circumstances, people should certainly consider a 50-year mortgage.
The way most people think about mortgages and home affordability is: what is the most expensive house I can buy for xxx monthly payment? So a 50 year mortgage has two main consequences: (1) home prices go up; (2) banks make more money (from loan having more and higher interest payments and from the home price having gone up). So, people end up paying whatever they could afford to pay anyway, but a higher percentage of that becomes profit for the lender (and the builder?). The housing market of a certain region is like an ordered queue of people with a certain amount of money to get the next best house…changing the loan doesn’t change anything except the bidding price. It does help existing homeowners with multiple units, at the cost of the young.
That’s a bad way of looking at a home purchase, I know. I wish we had more education to entice people into buying modest homes.
Karsten can you answer whether you are a Trump supporter so I can gauge any possible bias in this?
In the 2028 presidential election I will support the ticket “Econ / Math”
Which is a more hopeful message than some bumper stickers I’ve seen recently, like “Asteroid 2028”
What about a 30-year TIPS mortgage as a policy idea? Rate is ~2.3% lower and in exchange borrower agrees to have future payments rise with inflation. Payment would be ~20-25% lower at today’s rates (maybe even lower because I think the mortgage spread would also be less in this framework). Wages generally rise with inflation so additional credit risk to afford rising future payments would be minimal.
Your real rate is 2.3% lower but you have to pay about 2.3% inflation compensation every year, so the total is about the same.
Also, just it your wage goes up with inflation, it is not very comforting if you need to make a payment equal to CPI% times the loan balance plus the real interest all in one year.
My favorite line” So, why should private borrowers be excluded from interest-only deals when everyone else is welcome at the table?” – Agree 100%”
Every boom and bust cycle we apparently have to do this thing where we pretend history didn’t exist, where regulations that protect ordinary folks need to be recast as “exclusion”.
The reason we exclude normal borrowers from these kinds of instruments is because they are disastrous historically. People will spend on credit cards with 100% interest rates. They will buy stocks in companies with no financial disclosures based on used car salesman pitches. They will buy bridges. They will invest in ponzi schemes. They will buy homes with mortgages they could never pay off based only on the assumption that prices will go up and rates will drop and they can refinance.
The problem with “well dumb people will be dumb, let them have the chance to do it” is that they don’t just affect themselves. Financial crises are caused by the credit bubbles produced by people doing irrational things with their money. Trying to operate the economy under the probably false notion that individuals are rational economic actors is ruinous to the economy, so exclusion is necessary.
Maybe you didn’t read that far, but I explicitly mentioned why the Great Depression is no longer relevant.
After every crisis we retroactively implement “solutions” that likely wouldn’t have solved the prior crisis, but for sure annoy everyone going forward.
* Dodd-Frank: named after two politicians that were in bed with the mortgage industry (one of them literally) before the crisis and pretented any kind of reform.
* TSA going after water bottles. While not finding dangerous items in more than 70% of the test cases. https://www.cbsnews.com/miami/news/tsa-fails-bomb-weapons-test/
I’d simply generalize what you’re getting at, because I think that simplifies the discussion. Financial crises exist because perceived (but false) alpha is uncovered by market data after a hysteresis that produces a shortfall – then something happens to make resultant market corrections worse. Nothing more, nothing less.
Stupid is inevitable (I’m saying this not just as somebody with an Economics, Human Factors Engineering, and Military background – but I know stupid), and stupid people putting their resources into bad ideas remains the modus operandi of the universe, so adding regulation cannot really fix that, and is more likely to cause further problems when that large voting bloc of people pressure politicians and bureaucrats to change the rules of that system rapidly in ways that they perceive would rectify their (stupid) decisions.
I don’t think we’ll get a complete Great Depression inducing effect anymore, but that’s honestly because the technocratic implements of trading have outpaced the ability of slow bureaucracies to screw things up, and I think this one individual factor is probably one of the silent buoys holding market valuations higher than good models suggest – the bottom of the next crash will be higher and shorter simply because the ability for the apparatuses of the regulatory state to actively make things worse are an order of magnitude slower than trade decisions… so as much as I want to disagree with Karsten about ‘The Great Depression is no longer relevan’t, in this instance it is (and for SWR calculations, that remains a pretty solid filter).
Haha, thought you would like that one!
ah Karsten, I think what you got wrong is the reason the general population would go for a 50y mortgage, not the financially responsible crowd which is a small fraction in this country.
So, we penalize the entire population for the stupid things the other folks might be doing? That’s sad.
We should try tighter lending standards, i.e., high FICE scores, higher down payments, etc., to screen out the not-so-responsible borrowers from the 50-year mortgage pool.
If the choice was up to us financially responsible, yes, but it never is
And as always, the irresponsible folks hold everyone else hostage. It’s too bad that we want to throw out the baby with the bathwater. I hope that tighter lending standards (i.e., high FICO score, require someone needs to qualify for a 30y loan before they can get a 50y loan, etc.) are more effective than ruling out 50y loans completely.
Well thought out article. I’m not sold that the 50 year would do much except cause a rise in prices which of course doesn’t solve anything. We always hear about the supply problem and you state “particularly in the most desirable areas with the best employment opportunities”. Well not everyone can live in the most desirable areas! I personally would like to live in a house exactly like mine (4/3 2400sq ft) on the slopes of Whistler. We have to be realistic on what supply and affordability means because in most markets there is alot of affordable supply if you are willing to commute. Now the portability topic is very interesting and I’d like to hear your opinion on that. I’m thinking that could unlock some supply and get people moving. Or add loan assumptions back.
Yes, that’s a good point: price is a signal. A referee of sorts. A high price makes sure that scarce resources are allocated efficiently.
I like the “assumptions” idea. That’s something we should push more. Of course, subject to credit reports, etc.
I feel way more vindicated about discussing this as ‘the return of an interest-only loan for housing’, because functionally that’s what it is for the first 15 years anyway. If this is the one random thing that reduces housing adhesion enough to get established homeowners to move to downsized new builds and create space for new families, I wouldn’t even be that surprised (even though the short term answer is just going to be a buoy toss to existing overheated property valuations of all kinds).
Thank you Karsten, this is great analysis.
Thanks! Yes, great point, that’s a nice side effect.
I would think about a 50-year mortgage the same way I thought about a 30-year one back when we financed our current home 40 years ago. . .
Wow! Someone is willing to lend us money at a fixed rate for 50 years with no option to adjust that rate, while we, on the other side of the bargain, will have the absolute right to pay off or refinance the loan at any time. And, the interest payments will be tax deductible annually, whereas the capital gains in our investment account will accumulate tax free.
Is the interest rate they’re offering lower than the long-term return of the S+P 500?
Precisely. As one of the people who refinanced in late 2020/early 2021 (a house bought in a much more reasonable housing market)…
It’s basically a pinky promise, not a loan. It’s a pinky promise that I’ll pay back the principal once I factor in the actual net inflation. At this point, I’ve accepted that I own the house I’m in regardless of future financial situations.
My largest single point financial regret that I knew at the time was that I could have refinanced to the entire inflated value of the house and invested the difference, because I’d be six figures ahead by now once I factor in the mortgage deductions.
I recently borrowed money by using a box spread. It’s got some incredibly attractive features – essentially an interest only non-amortizing loan at an interest rate significantly better than you can get from any bank. Another way of looking at it is borrowing against your securities, which you can already do via a margin loan, but again at a much better interest rate. It almost feels too good to be true.
There are a few disadvantages though. It’s using up enough margin requirement that it puts a damper on the options trading I’ve been experimenting with. The bid-ask spread is also pretty annoying for a couple of reasons – first, it makes it tougher to exit the trade early if you want to, and second, my margin requirement for the house surplus calculation at Fidelity is calculated using the ask price for short options and the bid price for longs, so it is often up to 10% higher than the nominal amount of the box spread. I’m concerned it may contribute to a margin call if my underlying assets drop in value too far. Obviously the margin call would still be a concern without the bid/ask spread annoyance, but the bid/ask spread might make the call come sooner and be deeper than it otherwise would. Lastly, while the section 1256 tax treatment is mostly a positive, I’m concerned about how the options will be marked-to-market at the end of the year. I’m not certain how that will happen – it could be just the bid/ask spread, already annoying, but even worse could be last price if one of the options hasn’t actually traded in a while, making the mark well off of market value. If I get a bad enough mark from Fidelity I’ll have to look in to whether it is legal to use my own mark. I’ve always done my own taxes – it will be interesting to see if I can still pull that off with these nuances.
Nice! The box trade is a nice way to borrow money for a home.
Regarding your concerns:
True, you have the opportunity cost for the options trading. That’s something to consider. The lost revenue might be larger than the cost of getting a conventional mortgage.
The mark-to-market at Interactive Brokers seems to follow the convention that the combination of 4 contracts is listed as a “Complex Position” at IB with a total price equal to a zero coupon bond at the equivalent Treasury yields. Which is pretty neat: if you borrow, you get a larger amount to write off in the first year. I can’t speak to how Fidelity handles this.
Conversely, you get a large extra taxable capital gain on day 1 if you lend via a box trade.
It’s also true that a margin call could trigger the liquidation of one of the box spread contracts, which is quite dangerous because that eliminates the market neutrality. So, it;s always best to budget your margin very cautiously.
This is a fun article! I am typically a contrarian and when I hear the scamming get rich quick types such as Grant Carson’s and his type lambasting the 50 year mortgage AND the other side, I naturally start wondering what they are missing. Especially because I normally don’t agree with those types on anything.
I had three thoughts I’ve been munching through:
1. I’ve often thought of a mortgage as an inflation hedge, and the opportunity to inflate away a fixed cost debt with a 50 year mortgage doesn’t seem so bad, but also dependent on the rate environment. I’ve been enjoying my 2.15% 30 year mortgage…
2. I think a more interesting point is, “if 50 years isn’t the right number of years – then what is the optimal number of years you should target if you had a choice?” Why are we upset at 50 years – why not be upset at 30 years? Where’s the break even point.. I appreciate that in this analysis you can start to answer that less emotionally and more factually. And to your point, the truth is that most people don’t live in one house for 30 years. People are flipping in and out of houses and have been LUCKY in this cycle that the market has always just let them trade up.
3. I agree 100% about the con that this doesn’t focus on the right solution to solving the affordability problem. And if anything could hurt affordability of housing.
Thanks! I’m glad we agree on so many points!
1: Yeah, and a 50y mortgage with maybe only 0.20% points higher rate would have been an even better inflation hedge. 🙂
2: 15 vs. 30 is also hotly discussed, so we can never find a true sweet spot.
Everyone is against NIMBYs until something bad happens in their own back yard. Or maybe more like everyone is a NIMBY, some just pretend not to be. Or you go buy a new back yard in a better place, which is just a different form of NIMBYism…
Haha, just don’t mess with my backyard in the process, though.
One of the realizations I came to recently is that with the securitization of home loans and the like, the worst offenders aren’t even the true NIMBYs, who are directly affected by unaffordability of housing because the localized services they rely on become less affordable and more scarce.
It’s the NITBYIOBDLI (Not In The Backyards I Own But Don’t Live In) mindset that will be against literally every form of housing densification or even infrastructure installment project that could hurt their property value growth proposition, but are completely unaffected by the localized externalities.
Especially as the ‘permanent renter’ mindset takes over as multiples of median income clear 10x on breaking into home ownership, you’ll just wind up with an owner class that is only affected by that feedback loop when the rents they can charge become overly strapped because every non-housing expense the occupants/renters have to pay is denying them the ability to pay increasing rent is there any incentive to support any behavior other than the most egregious forms of NIMBYism.
Yeah, sadly, that’s what’s going on, at least in the highly desirable metro areas.
Pretty! This has been a really wonderful post. Many thanks for providing these details.
Digging into box spreads, especially when selling options – I came to the conclusion that while you could get the 4.25% rate 5 years out, that eating up your margin in this way means forgoing another 4-5% in option returns making the actual cost 8.25-9.25% or higher. in this case it likely better to borrow against the asset (new car, new house) and keep selling options.
But also based on this argument you wouldn’t have payed off a mortgage, so I need to read that article of yours again.
True, the opportunity cost is quite high.
My recommendation about mortgages: For the vast majority, it’s best to not have one in retirement.
If you use the options strategy, I can see that you like to leverage your house and put more money into this strategy. But always keep in mind that its is still a risky bet. Black Sawn events can happen. I don’t want to risk my house on that strategy.