Many Americans dream of owning a home. For a high percentage of them, it remains just that – a dream. Skyrocketing home prices combined with high mortgage interest rates have prevented them from entering the market. But what if a simple adjustment, extending the standard mortgage from 30 to 40 years, could change that?
This is the proposal conceived by John Hope Bryant, the CEO of Operation Hope, a financial literacy non-profit. In a recent CNBC op-ed, Bryant suggested that a 40-year mortgage could unlock the doors of home ownership to more Americans, particularly those individuals who previously couldn’t afford to purchase a home.
The Rationale Behind a 40-Year Mortgage
The rationale behind the proposal is straightforward. If potential homeowners spread payments over a longer period, monthly mortgage costs become more manageable. According to Bryant, this approach could be particularly attractive in the current economic climate where mortgage rates have remained elevated and home prices have reached record highs.
“I propose a bold new approach: a 40-year mortgage using the Federal Home Loan Bank (FHLB) system as the framework, with federal subsidies for first-time homebuyers who complete financial literacy training,” Bryant wrote. He argues that this strategy could resolve the issue of individuals who are sidelined due to lack of a budget.
The potential benefits of this strategy are extensive. For example, beyond the immediate impact on homebuyers, Bryant asserts that by making homeownership more attainable, the broader economy would receive a boost. Why? Because new homeowners are likely to spend money on furniture, renovations, appliances, and other services that could drive economic growth.
Mortgages Align with Modern Lifespan
A key point Bryant makes is that a 40-year mortgage is a better reflection of today’s life expectancy. The traditional 30-year mortgage was created during the Great Depression when life expectancy was around 60 years. Today’s life expectancy is nearly 80 years. As a result, a longer mortgage would seem to make sense.
The Numbers
What exactly does this extension translate to in terms of actual numbers? According to calculations by Business Insider, the monthly payment difference between a 30-year and a 40-year mortgage is around 7% at current interest rates. For example, with a 20% down payment on a median U.S. home priced at $412,000, a 40-year mortgage would result in a monthly payment of approximately $1,930, compared to $2,083 for a 30-year mortgage. While this calculation excludes taxes and insurance, the reduction is still significant, especially for first-time buyers.
In addition, if mortgage rates decline as they are expected to do later this year, the difference in monthly payments could widen even further. By lowering the overall cost of borrowing, the Federal Reserve’s anticipated rate could make the 40-year mortgage even more appealing.
The Caveat
There are downsides to a longer-term mortgage, however. The most significant is the increased amount of interest paid over the life of the loan. While monthly payments would decrease, homeowners would ultimately spend more on interest. This could potentially cost thousands of extra dollars.
Bryant views this as a minor trade-off, especially if you factor in the typical alternative, which is renting. If families rent, they have no equity and they are vulnerable to rising rents and potentially becoming displaced. On the other hand, a 40-year mortgage would allow more people to start building equity sooner which would set them up for longer-term financial stability.
The Bigger Picture
While a 40-year mortgage might lower monthly payments, it doesn’t resolve the root cause of the housing crisis, which is escalating home prices. The flip side of the coin, according to some experts, is that making mortgages more accessible would result in an increase in demand without addressing the supply shortage. Alternatively, some believe that the real solution is to build more homes to meet the needs of the growing population.
What’s Next
Regardless of whether Bryant’s proposal is realized, innovative solutions are needed to help more Americans achieve the American dream.
