The 50-year home mortgage is an idea whose time… would saddle buyers with a pile of debt and reduce their ability to build equity in their homes.
President Trump’s rush to trumpet Federal Housing Finance Agency chief’s Bill Pulte’s adulatory poster sent brokers, realtors and prospective borrowers scurrying to slide the levers on their online mortgage calculators. What they found when they amortized a loan over 50 years, versus the standard 30, was added debt that would extract, not build, wealth for families making their biggest purchase yet.
But the president’s trial balloon, a response to last week’s voter uprising over “affordability,” opened a broader conversation about better ways to not only help families get into their first house, but to get into an appreciating asset that can provide a foundation for financial prosperity.
A new crop of “shared appreciation” solutions that slide those levers in innovative ways are beginning to go to market in select cities around the country, including Washington, DC, Detroit, Philadelphia and Raleigh-Durham and Charlotte in North Carolina. The new models seek to correct for some of abuses of earlier models of shared appreciation, sometimes called “home equity investments,” which have been criticized as tilted toward investors rather than home buyers.
Call the new model “fair share appreciation.”
“Creating prosperity for all is really front and center on the minds of people across the country and home ownership is one of the pillars, and it’s just out of reach,” said Utah investor Jim Sorenson, the major investor in Homium, a New York-based digital home-equity lender that has completed a pilot project that helped 20 homebuyers purchase properties in Colorado.
“The environment now is more receptive and so we do view that as a positive – and we hope that these things are carefully looked at because you can also create more problems with bad policy,” Sorenson said (disclosure: Sorenson Impact Foundation is an investor in ImpactAlpha and sponsors our Ownership Economy coverage).
Those mortgage calculators quickly make clear that the main outcome of a 50-year-mortgage is growing debt, not growing equity.
Take a typical $400,000 home, near the median price nationwide. With a typical 30-year mortgage, a homebuyer’s monthly payment would be $2,481, assuming they are able to lock down the loan at 6.5% and come up with 20% of the purchase price. Over the course of the loan, they would pay about $493,000 in interest.
With a 50-year loan, the buyers would save $135 in monthly payments – but pay more than $1 million in interest over the life of the loan. Moreover, because of the way loans are amortized, they’d pay off very little of the loan’s principal for the first 20 years or so. Experts say the 50-year mortgage is essentially an interest-only loan for the first half of the term.
Mr. Pulte or President Trump might argue that few homeowners hold their mortgages to term, and that rising home prices create equity and the ability to refinance. But that same appreciation creates for better opportunities to harness the capital markets to the cause of helping more middle-income families climb the first rung of the ladder of wealth accumulation.
“You can’t just give someone access to homeownership without true affordability, because the model is not what it was 30 or 40 years ago,” said Marcus Martin of Homium, which provides shared-appreciation notes that can function as a second mortgage but without interest. The increased downpayment reduces the monthly payment for homebuyers and eliminates the need for private mortgage insurance.
“They’re going to have the same cost per month as the 50-year proposal, and they will have a half-million dollars more money, compounded over time, that they didn’t spend on interest,” Homium’s Tommy Mercein said. “And they will accrue equity at a faster rate.”
Homium’s payout comes from its share of the downpayment, on the same terms as the homeowners themselves. The New York-based lender has lined up partnerships in Detroit, Utah and Washington, DC to create hundreds of new homeowners next year.
The key is how the equity is shared. The Consumer Finance Protection Bureau early this year issued a bulletin warning of the risks to consumers from many shared-appreciation or home equity investment models. Specifically, it called out “multipliers,” in which investors extracted payouts disproportionate to their share of the down payment. In a footnote, the CFPB highlighted Homium as an exceptions, with its 1:1 payout ratio.
“If we give someone $20,000 on a $200,000 house, we get 10% of the upside of the house. So if you sell the house for $400,000 you don’t have to give us back $100,000. You have to give us back just double what we gave you, which is $40,000,” Mercin said. “So it’s easy to understand, it’s fair, and by the way, it puts the onus on us to explain that again and again and again over time so people don’t forget.”
If he was invited into the Oval Office, Mercein said he would tell the president, “I have a digital mortgage company that can provide a second mortgage, that’s interest- and principal-free, that can help teachers buy houses. Are you interested?”
Of the 50-year mortgage, he said, Trump “wouldn’t let his daughter take it.”
Helping first-time buyers get into the market is not a new idea. Down Payment Resource has tracked more than 2,000 programs that have launched since 2008 to help homebuyers with their down payments and closing costs,
In Denver, the Dearfield Fund has provided up to $40,000 in down-payment assistance to help hundreds of buyers purchase their first homes. The interest-free loans are paid back when the homeowners sell or refinance. They also pay Dearfield 5% of the home’s appreciated value. Most of Dearfield’s borrowers have been Black women (see, “How Dearfield Fund helps Black women buy homes to build wealth and health”).
Ownify pulls a different lever, helping first-time buyers get into the market with an even smaller stake, and letting them build equity over time. The Raleigh-based company buys a house of a buyer’s choice and issues 10,000 shared-equity “bricks” representing a home’s value. That allows buyers to enter with as little as 2%, or 200 bricks. For a $400,000 house, that means coming up with $8,000, far less than the typical down payment. Ownify covers closing costs, including insurance and property taxes, and assumes maintenance responsibilities of the home.
“What we look at is five years because that’s the average length for a first time homebuyer to stay in their first home,” Rohde said. Ownify has mapped out a five-year ownership journey for its homeowners to accumulate 1,000 equity bricks, or 10% ownership of the home.
“Once you’re at that 10%, that becomes your down payment in a traditional mortgage structure, where now you take on a 30 year fixed-rate mortgage,” he said.
“Our thesis here is that, rather than more debt, a shared-risk model, a shared-equity model is actually the better path into ownership for young people, for first-time buyers, especially for folks in the middle of the income pyramid,” Ownify’s Frank Rohde told ImpactAlpha.
After seeing the buzz about the 50-year mortgage, Rohde moved quickly to add the option to the company’s website to show the difference the company’s approach could make in total housing costs. He calculated that a 50-year loan would add more than $32,000 in housing costs over five years compared with Ownify’s approach.
As it enters the Philadelphia market next year, Ownify is seeking up to $5 million of equity to help first-time buyers get into about 100 homes. As part of his goal to develop a “safer path to homeownership,” Rohde is creating an income insurance program to cover the rent payments of its homeowners for up to 90 days. “So if you lose your job, we’re going to cover your monthly payments,” he says.
In a tweet, the FHFA’s Pulte acknowledged that the 50-year mortgage is only one of the home ownership innovations the administration is considering.
“We are laser focused on ensuring the American Dream for YOUNG PEOPLE and that can only happen on the economic level of homebuying,” Pulte wrote in a post on X. “A 50 Year Mortgage is simply a potential weapon in a WIDE arsenal of solutions that we are developing right now.”
The good news, Rohde said of this week’s swirl of publicity around the proposals: “It elevates the discussion on housing affordability.”
“The bad news is, the 50-year mortgage is a stupid idea.”
https://impactalpha.com/from-affordable-home-ownership-to-fair-shared-appreciation-and-generational-wealth