40 Year Mortgages Enter Mainstream Market

For all those folks out there who want to reduce their monthly payment and buy a bigger home - there is another option out there now - the 40 year mortgage!

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. 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 changes this month, June 2005, when Fannie Mae starts buying 40-year home loans.

For a long time, Fannie Mae would not buy mortgages with terms longer than 30 years. Fannie Mae stuck its toe in the 40-year mortgage pool a year and a half ago when it started a pilot program to buy the long loans from 22 credit unions. Now Fannie Mae has taken the plunge, and will buy conforming 40-year mortgages from any qualified lender.

There are three reasons you would need to consider if you want to opt for a 40 year mortgage. First, the interest rates are slightly higher than a comparable 30 year loan — usually an eighth to a quarter of a percentage point. Second, tacking 10 years onto the payment schedule doesn’t save all that much money every month. Third, interest-only mortgages have exploded in popularity in the last two years, and they offer even lower initial monthly payments than 40-year loans.

Some buyers might barely stray outside of those guidelines when applying for a 30-year mortgage — for example, if the house payment would be 29 percent of monthly income. In such a case, a 40-year loan might allow the borrower to qualify by sliding under the 28-percent threshold. We’re talking small differences, though: On a $200,000 loan, the monthly savings would amount to less than $64 on a 40-year, fixed-rate mortgage at 6.25 percent compared to a 30-year fixed at 6 percent. And the monthly savings shrink if interest rates rise.

You’ll pay a lot more interst on a 40 year mortgage - and banks love that. So, you’re going to see a rapid marketing effort to get these loans out there and make them available as much as possilbe.

If you’ve got a question on this or any other topic send me and e-mail and I would be more than happy to assist you. Remember to visit http://www.aimeeloans.com/ for all your home financing needs!

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