I’ve been reading more and more about housing affordability. As is inevitable, the 50-year mortgage is once again rearing its ugly head as a potential solution. However, I’m not convinced that the payment savings is worth the increased risk to either the borrower or the servicer.

There is a significant drop in monthly payments when moving from a 15-year to a 30-year mortgage (about 27%); even after accounting for the higher overall cost of the 30-year term. Extending the term further, from 30 to 50 years, reduces the payment by only another 6%. On a $300,000 mortgage, that’s a relatively small savings of just $108 per month.

Offsetting that, however, is that the borrowers’ equity build-up in the property drops precipitously over the first five years as the term is extended. This is due to a larger and larger percentage of each payment going towards interest as the term is extended. In the most extreme “perma-debt” scenario shown above, 0% of the payment goes to principal.

Our nationwide data shows that defaults peak in year five. Assuming no change (up or down) in the real estate market, a loan originated at 90% LTV (i.e., 10% equity) will build to 32% equity by the 60th month on a 15-year term. For a 30-year mortgage, equity increases to just 16%, and for a 50-year loan, it reduces further to only 11%.

Mortgagors often express frustration that, despite making payments for years, they see minimal impact on their outstanding balance. A 50-year mortgage would only intensify that problem. From my perspective, when balancing payment affordability and equity growth, the 25-year mortgage represents the optimal middle ground.