Lenders Test Interest in the 40 Year Mortgage
January 11, 2005 By Alan J. Heavens

Knight Ridder Newspapers

Here is an idea that has gone around and come back again: the 40-year mortgage.

Fannie Mae, the nation's largest source of home financing, is test-marketing a 40-year mortgage, using 21 federally insured credit unions around the country as its guinea pigs.

By limiting the test market to credit unions, Fannie Mae targets an audience of low- and moderate-income buyers. Spokeswoman Sandy Cutts said Fannie Mae looked at programs in light of its "American Dream" strategy, designed to create homeownership opportunities for such buyers.

In addition, credit unions usually serve certain professions, such as teachers, police officers and firefighters, who often cannot afford to live in the areas where they work.

Cutts said there were no data yet indicating whether people were opting for the 40-year mortgage. At the end of 2004, she said, the test-market results will be examined, and a decision on whether to continue - and maybe expand - the program will be made.

A 40-year mortgage allows you to buy more house for your money, but it has disadvantages as well.

For one thing, it takes you longer to build up equity in your home. For example, extending the mortgage payments over 40 years instead of 30 years could reduce the amount you pay each month on the principal by more than half.

For another, depending on the size of the mortgage and the interest rate, adding 10 years to the loan might result in your paying more than $100,000 extra in interest.

Fannie Mae's timing of its pilot project was a bit off. When it was launched a year ago, "interest rates looked as if they were heading up," Cutts said.

But fixed rates have stayed under 6 percent for most of the last 12 months, and it has remained a refinancing market. The most recent Mortgage Bankers Association of America survey showed that the refinancing share of all mortgage activity is increasing, closing in on 50 percent of the business.

Forty-year mortgages have been around since the early 1980s, when 18 percent fixed-interest rates were squeezing consumers out of the real estate market. One-year adjustable mortgages, with teaser rates of 16 percent, did not offer much of an alternative.

Extending a 30-year mortgage over 40 years served to reduce the high interest rates to within shooting distance of reasonable, and adjustable 40-year mortgages made payments even lower.

But interest rates today are a third of what they were 20 years ago, and economists say it is unlikely they will ever be as high again.

Demand has been so low and so few 40-year mortgages are written these days that the Mortgage Bankers Association of America does not even keep track of them, said spokesman Matthew Royse.

It is not that the 40-year mortgage has not been available - if you wanted one. Washington Mutual, one of the nation's largest mortgage lenders, has continued to offer it, as do many smaller lenders.

Other major lenders - Wells Fargo and Countrywide, for example - do not. At least not yet.

"Countrywide is constantly looking at consumer demand when evaluating loan products, and the 40-year mortgage is something we have on our radar," said executive vice president Vijay Lala.

Some critics have suggested that 40-year mortgages will encourage people to borrow more money than they can handle and that, if the longer-term mortgage comes into widespread use, it could help boost home prices even higher.

"As with any mortgage, the 40-year isn't for everyone," said Cutts, the Fannie Mae spokeswoman. "Our risk assessment and credit standards haven't changed. Mortgages will continue to be granted on a person's ability to afford them.

"Our studies have shown that people don't remain in their houses for the life of their mortgage," she said. "After five to seven years, they either refinance or move."

A homebuyer's perceptions play the biggest role in the kind of mortgage they go with, said Peter Buxbaum of Arlington Capital Mortgage in Bensalem, Pa.

"You have to remember that people don't look at the long haul, but at the size of the monthly payment," he said. "If the 40-year lowers that payment to make the house they want more affordable, then that's what they'll do. The fact that they'll never pay the mortgage off doesn't matter."

As long as interest-only loans remain "the No. 1 alternative to the plain-vanilla 30-year fixed mortgage," said Fred Glick, president of in Philadelphia, he does not see much of a future in the 40-year mortgage.

Interest-only loans, which have been around since the 1920s, allow buyers to increase the amount of money they can borrow without raising their monthly payments.

For example, with a 30-year fixed-rate mortgage that has an $800 monthly payment, some of that $800 goes to the principal. With an interest-only mortgage, all the payment goes to interest, meaning that a buyer can borrow more.


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