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Vol 5 No. 42 - July 6, 2005

Forty-year mortgages are another option

By Louise Bolger

The life expectancy of all Americans has gone up substantially during the past 50 years. If we’re living longer, why not mortgage our homes accordingly? Sounds like a good idea – perhaps. Keep reading.

The newest innovation in mortgage lending is about to hit the streets. Although 40-year mortgages have been around, they have been a specialized product, not easily offered and not easy to obtained. But in June, Fannie Mae, the government sponsored agency which buys mortgages from lending institutions, started buying 40-year home loans from qualified lending institutions. For a year-and-a --half it ran a pilot program to buy 40-year loans from credit unions, apparently with enough success for oiy to make this loan available as part of its mainstream lending practices. This decision, after years of not participating in 40-year mortgage programs, provides the incentive for lenders to offer 40-year mortgages as one of their products.

Forty-year mortgages have slightly higher interest rates, usually an eighth to a quarter of a percent, but the monthly payment will still be lower by extending the life of the loan another ten years. This fact might allow some buyers to sneak in under the radar and qualify for a mortgage.

Fannie Mae’s guidelines generally dictate that the monthly mortgage payment does not exceed 28 percent of the borrower’s monthly income. Although the difference in monthly payments for a 30-year as opposed to a 40-year note is slight ($64 on a $200,000 note), it might be just enough to stay below the 28 percent threshold and qualify a lot more people. This is especially true if interest rates rise as expected, and property values continue to soar.

The 40-year mortgage’s direct competition is the recent popularity in the past two years of interest-only mortgages whose monthly payments are very low. But interest only loans are not in everyone’s comfort zone, since none of the principal is ever reduced. If real estate values begin to level off, so will the popularity of interest-only loan,s since it will be perceived by some borrowers as too much of a risk.

Forty-year mortgage programs are a good news, bad news event. Good news if it helps qualify you for financing on your first home allowing you to join the real estate party. Bad news because the monthly savings may not justify the extra 10 years of payments at a higher rate. Basically, it should be viewed as another option in the mortgage lender’s bag of tricks, and another decision to make on the road to homeownership.

We all like to have choices in our lives, and since burning the mortgage has for most people become a thing of the past, perhaps the 40- year mortgage’s time has come. Who knows what the next 50 years will bring? Maybe the advent of 75-year mortgages. And make no mistake about it, there will be a market for those too.

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