Several years ago, when I was leasing my first car, a good friend (who had considerable knowledge of the car industry) gave me considerable advice to help me negotiate with the dealership.

His first piece of advice – “they will try to sell you on payment. That is just math. What you care about is the price of the car.”

When news broke this weekend about a possible 50-year mortgage option for American homebuyers, it brought me right back to the spirit of that advice. Undoubtedly, monthly payments matter. Afterall, you need to have the requisite cash flow to pay for the asset you have purchased and financed each month.

However, what matters above all in a home purchase is the price you pay for the asset. You ideally want that value to hold steady and better yet, rise in excess of the associated interest drag over time.

This 50-year mortgage option will help very little with the price of homes in America but it will influence payments – and therein lies the danger. A client mentioned this news story in passing this week and I thought it was worth cutting thru the noise and looking at the risks that hide beneath the surface.

What 50 Year Mortgage?

This past weekend, President Trump posted on social media, touting the idea of a 50-year mortgage that he had come up with alongside Federal Housing Finance Agency director Bill Pulte. The concept is clearly taking aim at the pervasive issue in America concerning housing affordability. A recent study shows the average median age for first-time homebuyers is now 40 (up from 31 a decade ago). Presently, mortgage rules in the US limit mortgage amortization terms to 30 years max.

Lower Payment, Higher Lifetime Interest

Undoubtedly, amortizing the cost of a home over a longer time period will lower monthly payments as you are spreading the cost over a time period that is longer. Denominator up, result down. It’s just math! Beneath the surface, it may very well drive up the total cost of homeownership by drastically increasing lifetime interest expense and potentially worsen housing affordability by driving up demand.

Here’s an example: Assume a $435,000 house (roughly the median cost today). Putting 20% down gets you a $348,000 mortgage. At a 6% interest rate, a 30-year fixed mortgage would mean a monthly payment of $2,086. On a 50-year fixed, that payment drops to $1,832. Payment is indeed lower. Isn’t that great? Perhaps. But now look at the lifetime interest. The interest paid on that $348,000 mortgage over 30 years: $403,117. For a 50-year mortgage: $751,113. Doesn’t appear that this math manipulation will work in anyone’s favor (unless they prepay which is not a given)

Challenges Remain

It’s even more important to realize that stretching the amortization period does little to address the main challenges with housing affordability (and may actually make them worse.

Massive Under Supply – There is meaningful undersupply of homes in America – especially the type of home that is affordable for first-time buyers. This proposal does nothing to address this challenge. In fact, one could make a good argument that the longer amortization period would make this problem worse. It may increase the amount of eligible borrowers (as more will likely be able to afford lower payments), driving up demand while doing nothing is being done to increase supply.

Down Payment Levels – Another issue with US housing affordability is down payment levels. The US banking system requires 20% down to avoid mortgage interest. As housing costs rise, so does the needed savings for the down payment. This is simply unattainable for most Americans. Lower payments do nothing to fix that challenge and again could make it worse if added demand drives house prices (and down payments) even higher

Lack of turnover – The housing stock in America is not turning over as much as it once did, largely due to mortgage rates. A vast majority of mortgage holders have rates well below current levels. This makes it untenable for them to sell and replace their low rate mortgage with a higher one, keeping them from listing their home. This 50 year amortization doesn’t help that and may actually lead to exacerbation of this issue in the future (as homeowners could lock in rates for most of their adult lifetime moving forward if they so choose)

Focus on Price of the Asset

Perhaps my biggest concern with this 50 year amortization proposal ties back to the advice I received when leasing my car. A home purchase is most likely the single biggest asset purchase American adults will ever make. It’s also usually the most emotional.

Allowing for further potential manipulation of the monthly payment (by stretching it over a longer time period) further distracts buyers from what matters the most in an asset purchase – the price you pay for an asset. Home purchases should be based on the reasonableness of the home’s price – not in the buyers ability to cash flow the monthly payment.

Real estate prices can (and have) go down. Banks protect against this to some degree by requiring a 20% down payments – which lets the home value decline by that much before the owners are underwater on their mortgage. However, a greater than 20% decline remains possible meaning homeowners are writing a check at time of sale to the bank versus celebrating the equity they’ve built.

A decision to purchase a home should be made based on the price of the home and the likelihood of that price staying constant (or rising) – not on the monthly payment stream.

If you are in the market for a home and tempted by this new amortization proposal, please proceed with caution and resist getting wooed by a tempting monthly payment.