Would Trump's 50-year mortgage have a much higher rate?

"President Donald Trump's proposal to offer 50-year mortgages to homebuyers has been met with extensive skepticism from real estate insiders. A key criticism of offering house hunters a longer-term borrowing option is that it would not save borrowers a significant amount of money in the short term and would drive up buyer's financing costs in the long haul. Numerous housing gurus claim the interest rate on these half-century loans would be significantly higher than the traditional 30-year mortgage."

"The bond market, which sets many borrowing rates, is a complex entity. Bond investors must balance the long-term risks, notably inflation, against the opportunity to secure a financially attractive yield for an extended period. Therefore, interest rates don't always increase in proportion to the maturity of a debt, especially when it comes to extremely long-term borrowings. And yields of mortgage bonds - which set home loan rates - are even more complicated as investors must weigh the risk of borrowers refinancing the loans."

"This logic is largely based on the fact that 30-year fixed-rate mortgages are more expensive than the already available but lesser-used twist, the 15-year home loan. Since 1991, the 30-year mortgage has averaged 5.83%, according to Freddie Mac, compared with 5.25% for the 15-year mortgage. But is extrapolating that gap, which varies based on the state of the economy, to a 50-year loan appropriate for estimating the rate on these half-century mortgages?"

Proposal for 50-year mortgages faces skepticism because such loans would likely not produce substantial short-term savings and could raise long-term financing costs. Critics expect interest rates on 50-year loans to be significantly higher than on 30-year mortgages, a view informed by historical rate differences between 30-year and 15-year loans. However, bond-market dynamics mean interest rates do not always rise proportionally with maturity, as investors weigh inflation risk and long-term yield attractiveness. Mortgage-backed securities add refinancing risk considerations that further complicate pricing. A Federal Reserve Bank study found 50-year Treasury yields might exceed 30-year yields by no more than 0.2 percentage points.

Read at The Mercury News