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The 40-year loan
When shopping for a mortgage you will find that there are many different options to choose from.
The two most popular types of mortgages are fixed-rate and adjustable-rate mortgages. After you have chosen what type of mortgage plan you want to go with, you must then figure out the term of your mortgage.
The term is the length of your mortgage in years. The two most popular terms are 15- and 30-year mortgages. But with the housing market slowing down, lenders are thinking of new ways to attract potential buyers to their services and are now advertising new 40-year loans.
The January 22, 2006 article by Joel Berg for The Patriot-News, “The 40 year commitment,” gives the details behind this new extended loan.
These 40-year loans may look attractive to potential buyers for a variety of reasons, but with any mortgage, it is important to look at all of the pros and cons in relation to one another.
“Although it lasts a decade longer, it offers lower monthly payments than a traditional 30-year mortgage. That flexibility allows buyers to afford a larger house than they otherwise might. Despite that advantage, lenders offering the longer-term loan believe it will attract only a few buyers. The reason: The lower payments are offset by a slower buildup of equity.”
Although a 40-year mortgage would allow you to pay smaller monthly payments, you would actually be paying a whole lot more in interest over time.
You also do not build the equity of your home as fast because you are taking a much longer time to pay off the balance.
Most industry insiders think that 40-year mortgages will continue to attract a steady stream of borrowers, but most people will opt for a more traditional mortgage.
“‘People will continue to be interested in them. But I still don't think it's going to become a large portion of our business,’ said Jill Carson, president of Lancaster-based Fulton Mortgage Co., which began offering 40-year mortgages in June throughout the region it serves, including the mid state. The loans will appeal to buyers who aren't planning to hold onto a property long and aren't worried about building up equity, Carson said. It also might attract people whose primary goal is holding monthly payments as low as possible. ‘I don't think it's something that the average consumer is that motivated to do yet,’” Carson said.
Interest rates are also higher when looking at 40-year mortgages, in comparison to 30-year mortgages. They are deemed more risky than the traditional term mortgages, thus making the rates higher.
“Another difference separates the 40-year from the 30-year mortgage. Many borrowers expect interest rates will be the same on both loans, said Peter A. Jones, a vice president with Broadview Mortgage Co. in Lower Allen Twp. However, the interest rate on a 40-year typically is higher by about half a percentage point, which shrinks the difference in payments compared with a 30-year mortgage, Jones said. The disparity in rates stems from the secondary market for mortgages, where a 30-year loan is the standard sought by institutional investors, Jones said. Fewer investors want to buy 40-year loans, raising their price.”