Getting a home loan can be a confusing and complicated process especially if you've never been through the mortgage process before. This Mortgage Guide tries to take some of the mystery out of the home mortgage application process. We explain in a step by step process what you need to accomplish.
40-year Mortgages
A 40-year mortgage is an appealing alternative to popular interest-only loans for some homebuyers. It allows them to keep monthly payments low at the same time paying down principal. Soaring housing prices are convincing some homebuyers to take on 40-year mortgage loans, which can reduce monthly housing payments making the mortgage payment more affordable.
Forty-year mortgages have lower monthly payments than 30-year mortgages, however because the borrower pays interest for 10 years longer they cost more over the life of the loan. However because of the lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year mortgages. It allows borrowers the opportunity to have a lesser payment, for many borrowers this is an attractive feature.
In general, Fannie Mae doesn't want the monthly mortgage payment to exceed 28 percent of the borrower's monthly income and for all debt payments (including mortgage) to exceed 36 percent of income. Some buyers might be just outside those guidelines when applying for a 30-year mortgage -- for example, if the house payment would be 29 percent of monthly income. In those cases, a 40-year loan might allow the borrower to qualify by sliding under the 28-percent threshold. However we're talking small differences. Some prefer 30 year mortgages to 40-year loans claiming you pay dearly by adding 10 more years to your mortgage.
That objection to 40-year mortgages has a major flaw:
When the borrower refinances the loan or sells the home most mortgages are paid off early, anyway.
Very few borrowers are going to make payments on the same mortgage for 40 years.
The Slow equity loan objection: Another feature of a 40-year mortgage:
You build equity more slowly.
With that 40-year loan in the example above, you would pay
$107.29 in principal the first month. With the 30-year
loan, you would pay $215.61 in principal the first
month -- building equity quicker
on a slightly smaller loan amount.
That said, consider this: As housing prices soar so do rental
rates. For many first time home-buyers a 40-Year Mortgage
may be the best avenue to getting them into their own
home with a mortgage that
fits their budget. While the equity of a 40-year mortgage
builds slower, as renters they are building no equity
at all. Also they have absolutely
no control over rent increases! Plus as home-owners
they can take advantage of the taxable benefit of a
mortgage that does not exist
as renters. At 40-Year Mortgage we offer a variety
of mortgage options including Fixed Rate Conventional
Mortgages, Adjustable Rate Mortgages
(some with conversion options) FHA-mortgages and VA
mortgages. All of our products are available with various
terms, each with its unique
features and benefits. We help home buyers decide which
mortgage is best for them. Let us help you make the
right choice.
To learn more
about a 40-Year Mortgage and/or the right loan for
your family, simply select a 40-Year
Mortage or applicable
quote option to receive a free mortgage quote.
Tax Benefits You may be able to deduct the interest you pay on the mortgage loan and some of the financing costs of the home, such as points. And your property taxes could be deductible. You should consult your tax advisor for more information.
Another way to obtain a lower mortgage payment — 40-year plan
There is a relatively new option if you are looking for a lower monthly mortgage payment. A recent article described interest-only mortgage loan programs as one way to lower your payment. A 40-year mortgage is another.
A 40-year mortgage results in a lower monthly mortgage payment than a 30-year mortgage and a higher payment than an interest-only mortgage.
Forty-year loans are currently available in either fixed- or adjustable-rate programs. Some programs even offer a 45-year choice.
The obvious advantage to a 40-year mortgage is its lower monthly payment. Unlike an interest-only payment schedule, you are decreasing your principal balance each month if you select a 40-year loan.
The amount of principal reduction is not as great as if you obtained a 30-year loan, but it’s certainly more than if you obtain an interest-only loan.
A 40-year loan may allow you to qualify for a slightly higher mortgage loan, thus a more expensive home. However, because there is a longer payout, the interest rate is usually higher than either a regular 30-year mortgage or an interest-only mortgage with a 30-year fixed term.
Let’s take a look and compare.
If you are borrowing $250,000 on a regularly amortized, 30-year fixed-rate mortgage at 6.25 percent, your monthly principal and interest payment is $1,539.
With the same loan amount and a 40-year mortgage at, say, 6.625 percent, your monthly principal and interest payment would be $1,486, or approximately $53 per month less. Because the interest rate is higher, the savings aren’t as great as you would imagine.
With the same loan amount and an interest-only fixed-rate mortgage at 6.5 percent, your monthly interest payment would be $1354.17. This is $131.79 lower than the 40-year payment and $185 lower than the regular 30-year payment. Remember also that taxes and insurance are part of your housing expense and will be added on to your payment.
Interest-only fixed-rate loans are also at a higher rate than regular 30-year loans. This is because there is more risk when principal is not being paid monthly. Another factor is that the payment on an interest-only loan will increase dramatically at the end of the interest-only period (usually 10 years) in order to pay off the loan in full at the end of the 30-year period.
Lenders offer 40-year mortgages on adjustable-rate programs as well. Usually, adjustable rates are somewhat lower than fixed rates. However, due to market conditions at this time, in most instances adjustable-rate loans are just slightly lower than fixed rates. Adding the 40-year payment schedule to a slightly lower adjustable-rate mortgage may make the difference in your payment comfort level or again in qualifying for the loan you are seeking.
Although short-term interest rates have risen numerous times over the past several months, long-term mortgage rates are still extremely favorable. There are a lot of great homes on the market in our area, so now is the time to take a look at prequalifying for a home loan and making an investment in your future. Contact a lender to learn more about the different loan programs and to get started on buying a home.
Fannie Mae Authorizes Purchase of 40 Year Mortgage Loans
40 Year Mortgage Loans Authorized for Purchase
When new cars cost $5,000 consumers took our two or three year car loans. Now they are commonly a five to seven year commitment. Likewise mortgages, which, four decades ago were amortized over 20 years, then 25 years, and now commonly 30 years, may soon have a new standard: 40 year home loans.
After test marketing a 40 year mortgage for some months, Fannie Mae announced last week that it will begin purchasing them. The Corporation acknowledged that changes in "housing market affordability and requests from (our) lender partners" led to the decision to extend the maximum loan term on certain loan products.
Fannie will now purchase 40 year fixed-rate mortgages and 40-year hybrid adjustable rate mortgages (ARMS) with initial fixed periods of three, five, seven, or ten years. Not included in the new purchase standards are biweekly mortgage products, loans secured by manufactured housing, loan to value ratios greater than 95%; and ARMS with initial fixed rate periods shorter than three years (including the popular 1-year ARM) or with any subsequent adjustment period greater or less than one year. Also on the no-fly list are negative amortization loans.
Forty-year mortgage loans are not new, they have been tried, even promoted in years past and some lenders have continued to write them in special circumstances. When test marketing began a few months ago a number of mortgage pundits soundly denounced them because of the greater interest costs over the life of the loan. Conversely, however, the much lower monthly payment may make the 40-year a good choice for homeowners who have a limited time-frame in which they will own the home or keep the loan. Regardless, with Fannie opening its part of the secondary market to them, look for mortgage companies, banks, and brokers to start strongly marketing various 40-year loan products to consumers.
Mortage rates increasing, time to look at mortgage options
Rates on the Rise - 40 Year Mortgage as a Viable Option
Banks announced slight increases in their short- and medium-term mortgage rates recently as interest rate pressures continue to build.
Mortgage rates are rising as inflation fears boost the chance of higher interest rates.
The increases apply to all terms up to three years at Royal Bank and BMO. TD Bank is also raising its posted four-year rate by a 10th of a percentage point, to 6.65 per cent.
The posted five-year closed mortgage rate at all banks remained unchanged at 6.75 per cent.
Banks finance mortgages in the bond market, where yields have been rising recently on expectations that short-term interest rates would rise further.
On Wednesday morning, the U.S. government reported that core inflation rose by a larger-than-expected 0.3 per cent in May. That all but guarantees that the U.S. Federal Reserve will raise its key overnight lending rate later this month.
In Canada, economists had been expecting that the Bank of Canada would stand pat on rate hikes at its next policy meeting in July. But a blowout employment report last week raised the possibility that the central bank would hike rates again.
Weichert Financial Offers 40-Year Loans Through Fannie Mae
Weichert Financial Services among First to Offer 40-Year Mortgages Through Fannie Mae
MORRIS PLAINS, N.J. -- Weichert Financial Services has introduced a fixed-rate mortgage that extends payments for 40 years.
Fred Watkins, president, said that Weichert Financial Services is one of a few lenders in the nation to offer the 40-year, fixed-rate loan being rolled out by Fannie Mae (Federal National Mortgage Association) on a pilot basis.
According to Watkins, Weichert Financial Services was chosen based upon, "strong historical loan performance" and "a business model uniquely focused on providing comprehensive mortgage solutions for homebuyers."
He said, "We're committed to providing the widest possible spectrum of mortgage products to help each customer achieve the best fit. We're delighted that Fannie Mae has tapped us to introduce a mortgage alternative that will help more people get the home of their dreams at a monthly payment they can afford."
Weichert Financial Services expects the strongest interest from first-time buyers wanting to enhance their purchasing power while gaining the security of locking in an affordable fixed rate at a time when mortgage rates are historically low.
Just as important, those lower payments may enable buyers to qualify for the dream home that might be beyond their financial reach with a 30-year payout. Compared to the benchmark 30-year, fixed-rate mortgage, stretching payments out for 40 years can lower the monthly payment "by as much as 12%," Watkins said, potentially resulting in a monthly payment that is lower by hundreds of dollars, depending upon loan amount, interest rate, and other terms of the mortgage.
The 40-year, fixed-rate mortgage loan joins a vast Weichert Financial Services' product array of more than 360 mortgage products. Experienced Weichert Financial Services mortgage professionals serve every Weichert real estate office and can address any questions or concerns buyers may have.
Wells Fargo Home Mortgage Adds 40-Year Loan to Suite of Products Designed To Make Homeownership More Affordable
Homebuyers in high-cost housing markets eager to find a way to make monthly mortgage payments more affordable have a new option with Wells Fargo Home Mortgage. The company is launching a 40-year fixed-rate mortgage.
“The primary advantage of a 40-year mortgage is a smaller monthly payment without the risks associated with interest-only loans or Option ARMs,” said Joe Rogers, executive vice president, Pricing, Products and Program Management, National Consumer Lending Sales, Wells Fargo Home Mortgage. “A 40-year term reduces monthly payments, making homeownership more affordable.”
Home prices have been rising in most parts of the country. According to the National Association of Realtors®, the national median existing home price for all housing types is projected to rise 5.8 percent in 2006 to $220,300.
Interest rates on a 40-year mortgage are expected to be about a quarter-point higher than rates on the traditional 30-year loan, but the longer term results in lower monthly payments.
Additionally, a 40-year fixed-rate mortgage doesn't have the payment shock that's associated with interest-only loans or mortgages bearing adjustable rates. If the buyer plans to stay in the house for a long period of time, they have the confidence they're investing in long-term financial security.
“A 40-year mortgage may be appealing to first-time homebuyers, consumers in high-cost markets, real estate investors and buyers on fixed incomes,” Rogers said. “Because it's a fixed-rate loan, buyers have protection from rising interest rates, so there's no need to worry about increasing principal and interest payments.”
Rogers added that 40-year terms can give sellers an opportunity to sell a higher priced home that some buyers wouldn't be able to afford with a 30-year mortgage.
Consumers should be aware that with a 40-year mortgage, more interest is paid over the life of a loan when compared to a 30-year loan. In addition, equity builds more slowly. During the early years of a mortgage, the majority of the payments are applied toward interest, not principal, so equity takes longer to accumulate than a shorter-term mortgage. On non-conforming loans, the loan is amortized over 40 years, but balloons in 30 years, meaning the customer must provide a lump sum payment at the end of 30 years to fulfill the obligation of a 40-year loan.
By paying off their 40-year mortgage on a bi-weekly drafting plan, Rogers says consumers can help alleviate some of those issues that longer-term loans present.
“A bi-weekly mortgage drafting plan essentially allows you to make a 13th house payment each year,” said Rogers. “In addition to being a great budgeting tool, it can reduce the term of a 40-year loan down to approximately 29 years. That accelerated payment schedule allows you to build equity faster and reduce your overall interest obligation.”
For example, on a $400,000 loan balance with a 7 percent interest rate (7.05% APR), Wells Fargo’s bi-weekly Accelerated Ownership ProgramSM may reduce the term of the loan to approximately 29 years and save the borrower an estimated $250,000 in interest payments.
The two mortgage programs you'll see touted more than any other are the 30-year and 15-year fixed rate mortgage programs. Most homebuyers use a 30-year, fixed-rate mortgage where the loan program allows for 360 payments with a fixed interest rate. Those who are debt averse (and who are able to handle higher monthly payments) will opt for a 15-year mortgage, while those who are skimping to get into the home of their choice usually go for the lower-payment, higher-interest 30-year.
Generally, a 15-year comes with a lower interest rate, but much higher monthly payment. For a $200,000 mortgage, for instance, the difference between the two payments is nearly $500 (using a 5.75 percent interest rate).
Thus, you can see why most homeowners who purchase such a property are more willing to put out principal and interest payments of $1,167 for the $200,000 mortgage instead of $1,660.
There's another mortgage animal out there that may be an option for some buyers -- the 40-year mortgage. As average home values continue to outpace average income growth, homebuyers are seeking out how to get into their property of choice and keep their payment as low as possible.
For those stuck on the 30-year concept of mortgages, they may have considered adjustable-rate mortgages to do so. The above loan amount on a 5/1 ARM with an interest rate of 4.51 percent would cost the homeowner nearly $200 less per month -- but there's not the security of a fixed rate over the years of homeownership.
A 40-year mortgage can provide a low interest rate and a lower payment at the same time. If you spread the $200,000 mortgage over the additional 10 years, the payment drops by $102 per month -- a cash savings of $1,224 per year. However, as you can guess, there are trade-offs. With the lower payments, you lose the ability to pay the loan down as quickly, the equity built up through debt elimination drops and you will pay out $91,400 in interest over the life of the loan.
That sounds like a lot of money -- and it is -- however, the reality is that most people won't stay in a mortgage for the full term (except for maybe the 15-year programs). Just in case you do stay put over the next 50 years, here's the difference in the bottom line for the three above programs using calculators at www.BankRate.com:
15-year
Amount: $200,000
Payment: $1,660
Interest over the term: $98,947
Total Payments: $298,947
30-year
Amount: $200,000
Payment: $1,167
Interest over the term: $220,172
Total Payments: $420,172
40-year
Amount: $200,000
Payment: $1,065
Interest over the term: $311,572
Total Payments: 511,572
As you can see, the 15-year obviously allows you to purchase your house for less money, however, it will cost $600 more per month ($7,200 annually) over the 40-year program to do it. Most people I know don't have that type of extra cash. However, most people I talk with have a psychological block when you talk about a 40-year mortgage versus a 30-year loan (even though they'll move before either one is paid off).
The bottom line depends on the homeowner's financial plans. The 40-year loan can be used for two purposes: provide more buying power, meaning a higher priced home; or it provides the buyer with more cash on a monthly basis for saving and investing for future needs, such as retirement or schools funds.
