With their proposal for a 50-year mortgage, the Trump administration has brought new attention to how Americans finance their homes. Through this Borrower Benefit, the initiative hopes to relieve some of the monthly payment stress from borrowers, which could help more people realize the dream of homeownership. As experts explain, lengthening loan terms comes with major compromises. The tradeoff is increased interest payments over the life of the loan. As Americans grapple with rising debt levels and an evolving housing market, this proposal raises questions about the future of homeownership.
By extending amortization to 50-years, borrowers can reduce their monthly payments substantially. That would likely lead to them having to pay interest twice. This is in contrast to conventional 30-year mortgages at today’s interest rates. This proposal points to a growing trend of increasing loan terms. We know many lenders are finding ways to offer these alternatives that can better serve consumers facing economic distress.
The State of American Debt
The overall financial landscape for Americans is bleak. Today, total consumer debt is a record high of $18.6 trillion, up 3.6% just in the last year. This unprecedented level of debt, mostly mortgages, but also auto loans and student loans, has experienced a significant increase. The New York Federal Reserve records high levels of household debt dating back to 2003. In our recent report, their findings highlight a truly alarming trajectory of overall financial health.
Credit scores were not spared either, suffering the sharpest drop this year to date since the Great Recession. With over 14% of student loans becoming seriously delinquent last quarter, many borrowers face increasing pressure to manage their finances. As of the third quarter of this year, the share of serious delinquency on consumer accounts soared to more than 3%. This spike indicates that many of these people are really struggling to pay their debts.
Credit card debt has increased by close to 6% in the last year, totaling a record-high $1.2 trillion. In light of these challenges, the auto industry has taken an about face. Now, because the average price of a new car has skyrocketed over $50,000, it’s pivoting to pushing seven-year car loans. Financial pressures are increasing for most Americans. Consequently, they are often on the brink of falling into or out of homeownership.
Homeownership: A Double-Edged Sword
Homeownership continues to be an essential part of the American dream and one of the predominant ways Americans accumulate wealth. Matt Schulz, chief consumer finance analyst at LendingTree, is passionate about homeownership and homebuyers. He argues that it has historically been one of the most accessible avenues for the average American to accumulate wealth. Yet, due to skyrocketing property prices and 40-year fixed mortgages, this American dream is slipping further from the grasp of many.
As life expectancy in the U.S. hovers around 80 years, younger borrowers may find it difficult to reap the long-term benefits of homeownership if they secure a mortgage later in life. Schulz advises against taking on longer-than-usual loan terms, stating, “Generally speaking, the more you can avoid longer-than-usual loan terms, the better.” This feeling is echoed among numerous financial experts who warn against jeopardizing future fiscal sustainability in exchange for immediate aid.
The consequences of longer loan terms go further than impacting just first-time homebuyers. An increasing number of buyers are looking to extended mortgages to afford their new home. If left unchecked, this trend will shape the way gaining wealth through homeownership is perceived by future generations to come. An ever-larger share of loans are for longer terms. This can turn debt from a temporary solution to a permanent fixture in consumers’ lives.
Inflation and Financial Stress
Yet stubborn inflation persists, adding further strain on American households. The increased cost of living is adding a new strain on people who are already shouldering a lot of debt. Financial consumer protection advocates argue that consumers are forced into these alternative financing methods. One such alternative that’s taken the market by storm is buy now, pay later (BNPL) programs.
According to a recent Federal Reserve study, Buy Now, Pay Later (BNPL) is a prevalent choice among millions of adults who report low financial well-being. For these people, liquidity or access to credit is a persistent challenge. Half of BNPL users consider Buy Now, Pay Later their only option for making necessary purchases. Now, in today’s tweetworthy terms, see the desperation that some borrowers feel in today’s harsh economic climate.
Meanwhile, inflation continues to increase the cost of living. As such, extended mortgage terms have been a controversial and much discussed issue among policymakers and financial analysts. Though a 50-year mortgage might provide relief in the short term for some, its long-term effects would make Americans even more deeply beholden to debt.