Considering 40 year mortgages
Taking out a mortgage will be one the biggest financial decisions and transactions of your life.
Rising real estate prices have forced many to begin thinking about ways to lower their monthly mortgage payments.
Nontraditional mortgages that offer alternative payment or interest options are referred to as “exotic” mortgages.
One such “exotic” mortgage is the 40 year mortgage. This loan allows borrowers to have lower monthly paymenst, but the life of the loan is substantially longer.
Dave Chapman’s article, “40 Year Mortgages - Are They Right For You?” posted on ezinearticles.com dives into the pros and cons of the growing popularity of this type of mortgage.
“A 40 year mortgage, with either fixed or adjustable rates, is starting to receive more attention in the mortgage business. With interest rates rising and real estate prices booming in 2005, lenders are starting to offer the 40 year mortgage as a viable option for buying your dream home.”
Even though 40 year mortgages have technically been in existence since the 1980s, they accounted for a very small percentage of loans, about one percent, until recently.
As a result of higher interest rates, borrowers are in search of a way to lower their monthly payments. The 40 year mortgage gives the borrower the ability to afford a home that he or she probably would not have been able to with a traditional mortgage.
There is option to the basic 40 year mortgage. You can apply for the terms to have an adjustable rate or pay for interest only for the first five years of the loan.
“Other mortgage options that are being offered by mortgage lenders include a 20-20 mortgage, where the interest rates would adjust after the first 20 years.”
Another primary benefit of 40 year mortgages is that buyers can spend more money while purchasing a home. Stretching out the mortgage from 30 years to 40 years, allows you to afford a more expensive dream home.
“The 40 year mortgage is also good for first time homebuyers or those who need extra help, like young couples or those with less than perfect credit. This will give those homebuyers a chance to still invest in a home but without a high monthly payment. They need to keep in mind, though, that the disadvantage of this forty year mortgage is a higher interest rate in the long run. It also takes longer to build up the equity on the home because the borrower is further stretching out paying on the principal of the mortgage, which builds equity on a home.”
Many lenders are still weary of putting more effort into advertising 40 year mortgages because they feel there is not enough overall interest to make the mortgages survive. But this may all change soon.
“Fannie Mae recently announced that they would begin purchasing these loans. In September 2003, with a pilot program of 22 credit unions, Fannie Mae offered to buy back both fixed and adjustable rate loans and will soon expand the pilot program to many other banks & financial institutions.”
“Most experts are noting that these lengthier mortgages are not good for older couples or an older person seeking to invest in a home because it will take too long to build up that equity and the person could be paying for the home into their seventies or eighties. The retired person may not have the means to sustain paying a mortgage.”
There are a lot of options available for potential borrowers seeking to get a nontraditional mortgage. As interest rates continue to climb in the future, there will probably be more “exotic” mortgages introduced.
Just make sure you understand the terms and stipulations before you sign. Since they are not traditional, do not expect them to follow the same guidelines. Do not assume anything.