40-year mortgages
Forty-year mortgages have lower monthly payments than their 30-year cousins, although they cost more over the life of the loan because the borrower pays interest for 10 years longer. With the lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year mortgages. Forty-year mortgages have been rare because lenders couldn't sell the loans to investors through the government-sponsored enterprises Fannie Mae and Freddie Mac.
The mortgages remained on the lenders' books, tying up money for a long time. That state of affairs changed with June 2005. The demand for 40-year mortgages has been minuscule, partly because few lenders have offered them. The most-prominent 40-year lender is Washington Mutual. Fannie Mae assumes that more lenders and brokers will offer the long loans now that they can be sold on the secondary market. 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 mortgages loans, too. That's because the only tax deduction available to them is often the one for mortgage interest. On 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. Advantages Disadvantages 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. If somebody doesn't need a lower payment, but does need some added purchasing power to get the right house, a 40-year mortgages loan can be a good option. However, some of this effect of lower monthly payments is negated by a higher rate that is charged on the 40-year loan. Rates on a 40-year fixed are often one quarter to one half of a percentage point higher than a traditional 30-year fixed-rate mortgage.
Loans with longer terms carry higher rates because of the added time frame where a default may occur and because lenders and investors seek compensation for the longer period of time that their money is tied up. Another disadvantage that becomes significant is that the homeowner builds equity at a snail's pace. For first-time buyers looking to eventually move up to another, larger home, this slow pace of equity accumulation is a liability. Competitor The chief competitor of the 40-year mortgage is the interest-only mortgage loans. Interest-only loans occupy a big chunk of the mortgage market in high-price cities as buyers hunt desperately for ways to afford absurdly expensive houses. Most interest-only loans are ARMs. 40-year mortgages ARMs will have comparable interest rates to interest-only ARMs, but payments will be higher because the borrower pays principal in addition to interest.
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