Exploring 50-Year, Assumable and Portable Mortgages

On top of these factors, economic uncertainty about job security, inflation and broader instabilities aren’t helping either buyers or sellers to feel confident in making large life moves accompanied by large financial transactions of a home purchase. “Complex problems can have complex solutions,” is a statement I’ve learned to appreciate as it doesn’t seem like our modern-day world has too many simple problems.

The current housing market is no different and it seems to be quite a maze to try to navigate our way forward. In November, there were several concepts floated on social media by Federal Housing Finance Agency (FHFA) Director Bill Pulte. A few of these hot topics were 50-year mortgages, Assumable Conventional Loans and Portable Mortgages. Any ideas helping more Americans afford home ownership are worth exploring so that’s what I’d like to do in this month’s article. But reader beware, as I think you’ll find that these three ideas aren’t the “silver bullet” some would hope for.

The 50-Year Mortgage Solution

Simple math, right? Longer term, lower payment, more affordability? My team’s current average loan amount in Flagstaff is approximately $430,000, so just from that standpoint, we’d be looking at a monthly principal and interest reduction from $2,682 to $2,383, or otherwise about $299 per month. This is under the complete guesswork assumption of those terms being offered at the same rate and based on today’s low 6% range, 30-year fixed rate.

That’s pretty much where the good idea begins and ends and where some of the issues arise. First issue: Would these be at the same interest rate? There’s not a magic “bank of mortgage” giving out all these rates, there are investors like you and me, as well as large institutions that are considering their return on investment when it comes to mortgage-backed securities. We naturally see a reduction in interest rates when there is a shorter term, given that the total principal to the investor will be paid back sooner. A higher risk and cost are associated with longer terms. That face value savings then would likely be reduced by a higher 50-year term if the logic of today’s current rate and time cost of money were applied.

The next concern is overall cost to the borrower. Loan amortization is a very important term and reality when it comes to that question. Loan amortization is the schedule in which a borrower’s payment to the bank then contributes to interest and to principal. Initially most of the payment goes to interest but this shifts overtime. Not only does a 50-year mortgage mean that a homeowner is building equity at a much slower pace, they are also stacking up a significantly longer period of interest. Based on the same $430,000 average loan example, the 50-year mortgage borrower would pay an additional $463,410 in interest or essentially almost double that of the 30-year mortgage borrower, assuming both paid regular payments and went full term.

Finally, history would teach us that when lending costs go down, the cost of the asset goes up. Just look at what home prices did with sub 4% rates. Even though I know the cost of lending is a debatable one, given the last point on interest, if folks can have lower payments and more folks then can afford to buy, it is very likely that there is more demand. And without a matching increase in inventory, this could lead to higher home prices. Would a 50-year mortgage actually solve anything, or would we just be running in circles?

Assumable Conventional Loans

There are already assumable loans in the current market, which are government backed loans (FHA, VA, USDA). The idea here is that a buyer could take over the seller’s loan, which would ideally be at a lower rate than the current market. When these work, it can be quite phenomenal. However, in my experience with the current loan assumption concept, it takes the stars to align and they’re not a truly mass-market viable solution.

The first issue is price vs. balance. Let’s say the seller bought their home for $500,000 with 20% down so they started with a $400,000 loan. Based on their 3% interest rate, five years later their loan balance is approximately $355,000. With an assumed year over year appreciation of 3% annually, the current market value of that home would be approximately $580,000.

Let’s then assume the buyer can go through all the hoops to take over the $355,000 mortgage – they still then have to determine where they would come up with the remaining $225,000 to buy the house. If they have cash, then great; if they don’t have all that in cash, then they’d need to look at second mortgage options, which come at higher interest rates than first mortgage rates. Depending on the balance of the assumed loan and the balance of a potential second lien at a significantly higher rate than current market first mortgages, the assumption may not actually yield an overall savings as the cost of the overall financing would be done on a combined rate and weighted by the balance of both the first and second mortgages.

Yes, affordability goals can be a reference to every buyer but with the highest need members of our community looking at lower down-payment loans, these are basically untouchable given this math from the lower rate environment to now.

Portable Mortgages

Just like the other two ideas, the concept sounds fantastic at face value. Let’s take that same seller above with their $355,000 remaining mortgage at a 3% interest rate and put them in a position to move up. Instead of the current environment, which would have them paying off that mortgage to possibly then replace it on a new home with a mortgage rate in the 6% range, they would take their $355,000 balance at their 3% rate and somehow secure it against the new home. That simple term “secure it against” is where this already starts to break down.

Mortgages are secured debt against a specific piece of real estate, which then serves as the collateral. If a borrower doesn’t pay the debt, the collateral can be foreclosed upon and forfeited to the lender. Our current complex lending system provides credit approval for a borrower as well as approves the home (collateral) before they record the lien against the specific piece of real estate.

The vast majority of the home loans in the U.S. meet a standard set of criteria that allow the loans to be securitized and packaged together on the secondary market. In an oversimplistic explanation this allows for a universal standard of mortgage lending, a tighter control of quality of lending as well as a higher level of liquidity meaning more available lending.

This current system traces some roots almost 100 years ago with post Great-Depression Era response. This back end of the mortgage market has to calculate risk and value with quite a bit of complexity and the idea of someone just grabbing their current loan and running down the road to another property is almost the equivalent of pouring diesel in a gasoline engine – yes, they seem to be close enough in concept, but the engine is simply built differently.

This, along with what would be an entire retooling of an industry built around facilitating this type of tool, does seem a bit short-sighted once you consider that only those who got those low interest rates to begin with would benefit the most and not the broader population or the highest need of those first-time buyers in this market.

Are There No Shortcuts?

While I look forward to seeing what future solutions may continue to come to the table, the other phrase that I believe is then a strong conclusion for those looking to enter the housing market and navigate affordability concerns: There tends to not be many short cuts.

Yes, there can be more accommodative programs and current assistance resources, but in the end, instead of waiting for policymakers to save the day, I believe that a self-motivated, expert-guided plan to home ownership on your terms is likely still the best solution. FBN

By Chris Hallows

For additional information or to schedule an appointment visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W Rte 66 Suite A-3.

Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff.    NMLS 306345 Ark-La-Tex Financial Services, LLC NMLS 2143 Equal Housing Lender