Home loan reinvented - the 40 year mortgage!

In the last five years, as investors have stayed away from high-risk tech stocks, the price of real estate nationwide has increased dramatically. In parts of California, particularly in the San Francisco area, homes are selling for one-third more than they did just a year ago. These skyrocketing prices have made it more difficult than ever for buyers to purchase a home for the first time.

New mortgage options have been introduced over the years that are designed to make it easier for buyers to purchase a home. There are now hundreds of mortgage products and home equity loan products available, designed to make it possible for most everyone to purchase a home. Buyers can now obtain a mortgage with interest rates

 that rise and fall with the market, mortgages with rates that adjust once or twice during the life of the loan, and mortgages that do not require the buyer to make payments on the principal for the first few years of payments. These mortgage products are designed to make it easier for buyers to make payments in the early years of the mortgage, when their incomes may be lower. In the future, when the buyers’ incomes rise, they will be able to make the larger payments after the mortgage rates adjust.

A relatively new option in mortgages that may make it possible for more people to afford homes is the 40 year mortgage. Most fixed-rate mortgages are issued for periods of either 15 or 30 years, but the 40 year mortgage will offer somewhat lower payments. The product has been available for nearly 20 years, but few lenders have offered it. This may change soon, as Fannie Mae has announced their intention to purchase more 40 year mortgages from lenders. Mortgages frequently change hands, and more lenders may be willing to offer 40 year mortgages if lenders know that they can sell them to Fannie Mae.

Interest rates on a 40 year mortgage will probably be somewhat higher than for 30 year loans. The tradeoff will be that the payments will be lower for buyers, despite the slightly higher interest rates. Anyone considering a 40 year mortgage should be aware that the total amount of interest paid on a 40 year mortgage will be significantly higher than that paid on a 30 year mortgage. Then again, studies show that few buyers stay in their homes for more than ten years, so this factor may not be all that significant. Buyers may simply opt for the 40 year mortgage to obtain the lower payments even if they do not expect to own the home for the entire duration of the loan schedule.

Like many mortgage products, the 40 year mortgage is clearly not designed for everyone. This loan is probably best suited for young couples who are buying a home in a high-priced area, such as San Francisco or Washington, D.C.  It may also be a favorable option for real estate investors who want a minimal payment but do not wish to obtain an interest-only mortgage. Regardless of the reasons for applying for one, the 40 year mortgage will probably soon become a popular home loan option.