40-year mortgages: lower payments,
not for everybody
Lenders are quietly pushing 40-year mortgages again as
a way to help borrowers cope with the higher interest rates seen in 2000.
The loans help reduce monthly payments by stretching out
the time that a customer has to pay the money back. While that can help, experts
caution that the unfamiliar loans aren't for everybody. They come with a catch
-- a radically higher interest bill over the life of the loan.
is lower payments, but that's really the only attraction," says Monika Fitzgerald,
a branch manager in Richmond, Va. with Mid-Atlantic
"Usually when the rates rise,
lenders are looking for attractive products that the public will accept so that
they can buy a home or refinance or whatever they're needing to do," she adds.
"That's kind of when it's suggested again."
every lender offers 40-year loans even though they've been in existence for several
years and not every lender who does writes them the same way. Some just offer
a 40-year amortization option on their regular adjustable rate mortgages. A customer
might get a 5/1 ARM with five years of fixed payments, but 35 years of annual
rate and payment adjustments thereafter rather than the usual 25. Other mortgage
brokers sell straightforward 40-year fixed rate loans. Except for the longer amortization
schedule, they're essentially the same as the old reliable 30-year fixed rate
mortgage available everywhere.
benefit is lower monthly payments
In a few cases, 40-year borrowers
will have to put more money down or pay a bit more in points than conventional
customers, though experts say that's uncommon. No matter how the loan is structured,
the benefit to the borrower remains the same: lower monthly payments.
$150,000 5/1 ARM at 6.875 percent costs about $985 a month on a 30-year payoff
schedule, for instance. But the monthly principal and interest payment drops to
$919 on a 40-year schedule, according to Christine Bell, owner of the Pottstown,
Pa.-based mortgage brokerage Allegiance
"The payment's less and
there's no add-on to the rates or fees," Bell says. "They can make the lower payment
and it's not costing them anything."
purchasing power, too
If somebody doesn't need a lower payment,
but does need some added purchasing power to get the right house, a 40-year loan
can help, too, according to Henry Savage. The president of PMC
Mortgage Corp. in Alexandria, Va. writes a weekly mortgage column for
What a 40-year mortgage
would do for you
Say somebody could only afford to spend $2,000 a
month for a mortgage. When rates were around 7 percent, that borrower could have
afforded a 30-year loan for about $301,000. But with rates at 8 percent, the same
customer can only borrow a maximum of $272,500. If the lender upped the repayment
term to 40 years, however, the customer could borrow just under $288,000 for the
same two grand a month.
"I can still buy that
same house and keep my payment the same because I can spread out the loan for
40 years," Savage says.
Of course, there's no
such thing as a free lunch. Any time a borrower adds years to a mortgage term,
the overall interest bill rises. The $150,000 ARM that Bell described would cost
almost $384,000 in interest over 40 years -- some $121,000 more than it would
if the term was only 30 years. That's assuming the rate stayed constant after
the first adjustment five years out.
loan officer sits down with the consumer, he or she can give the consumer the
option or the choice," says Savage. They might say, " 'If you want to buy this
house on a 30-year loan, your payment is going to be this, your interest is going
to be this. If you choose a 40-year loan, your payment is going to be lower, which
is nice, but your interest is going to be higher.' "
longer to build equity, though
40-year borrowers much longer to build up equity, too. On a $150,000, 30-year
loan at 8 percent, $100 of the first $1,100 payment goes toward reducing the principal
balance. Extend the loan to 40 years and only $42 of the $1,042 payment goes toward
Because 40-year loans come with these
advantages and disadvantages, consumers should consider what they want to get
out of a mortgage before deciding whether one is right for them.
Experts say the loans can work well for first-time home buyers or other people
who need all the help they can get purchasing a home. As times goes on, their
salaries should increase enough that they can prepay their loans or refinance
into shorter-term mortgages to lessen their interest costs. High-income borrowers
might want to look at 40-year loans, too. That's because the only tax deduction
available to them is often the one for mortgage interest.
the other hand, older buyers will probably want to stay away. Most don't want
to be carrying mortgage debt into their 70s because they won't have the income
to support the payments after retirement.
who is interested in keeping their payment low is going to be interested," says
Shari Steiner, a real estate broker who co-authored Steiner's Complete How
to Talk Mortgage Talk. But "it isn't a great idea for older people to put
their home in hock for that long."
ways to reduce payments
also use a variety of other methods to reduce their payments, at least in the
first few years of the loan term. Their options include shorter-term ARMs and
buydown loans. With the latter, a home seller or builder pays a few points to
the borrower's lender to reduce, or "buy down," the rate and payment early on
in the mortgage.
"There are so many products out
there that will offer a lower rate than a 40 year and the result is the same payment,"
says Mid-Atlantic's Fitzgerald. "Three year, 5-year adjustables, 1-year adjustables,
interest-only loans -- there is just a huge array of products we can offer the
customer that will keep their payment down."
experts say 40-year mortgages will likely become more common this year if interest
rates stay high. They aren't easy to find yet, however, so borrowers who want
one may have to devote some extra time to the search.
haven't seen that many of them and I work as a real estate broker, so I'm out
there talking to lenders all the time," says Steiner. At the same time, "Some
have said, 'We're getting a 40-year product coming up but we don't have it on
"It's kind of a rate situation," she
adds. "People are looking at other things they can do to keep people's payments
low and this is one of the things that has been suggested."