40 Year Mortgages - Are They Right for You?
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.
Although the 40 year mortgage has been around since the 1980s, it only made up for a small percentage of loans, less than 1% at most times. Now with higher interest rates, borrowers are looking for a way to save money with lower monthly payments. With rising interest rates, the 40 year mortgage gives buyers the opportunity to still buy the home they want and receive a lower payment.
For those that arenít interested in putting that many years into a mortgage or in a 40-year amortization, many are beginning to also consider a combination of other ARMs and interest-only mortgages. These mortgages are currently making up a large percentage of the mortgage originations and continue to increase as interest rates increase. These loans are often referred to as option ARMs, or short-term ARMs that start out with introductory rates of as low as 1%, but give buyers a variety of mortgage payment options.
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 reason many borrowers are considering, and lenders are offering a 40 year mortgage is so that buyers can spend more money while purchasing a home. By stretching out the mortgage from thirty to 40 years, there is still the possibility of purchasing the home of your dreams.
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 finding that there is not enough interest in the 40 year mortgage to sustain offering them through the lending company, but this may change since 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.
For borrowers who donít have many options, consider starting with a 40 year mortgage and then refinancing down the road. If you donít refinance the loan there is always the option to send in pre-payments as your income increases.
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.
The bottom line is that there are a number of options for homebuyers and those options need to be taken into consideration before deciding on the mortgage that best suits you. These new mortgage options also open up the market to a range of new borrowers so this could always fuel even higher values in the real estate market. As well, a 40-year mortgage is not the best option for everyone but there are viable alternatives that can help you purchase the home you want. Be sure you are aware of the advantages and disadvantages and always consider your options for refinancing down the road.
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