I saw this article on the 40 year as well - writer is from Orange County, CA aka mortgage mecca...food for thought in markets with high median home prices.
The Orange County Register, Calif., Jonathan Lansner Column
By Jonathan Lansner, The Orange County Register, Calif.
Jan. 10--The 40-year mortgage is nothing new.
As a matter of full disclosure, I once borrowed that way -- circa 1990.
I just find it amusing that lenders are peddling 40-year deals again.
The bottom line is that these loans slow down what people customarily do with a mortgage: pay down the debt.
At a price.
Interest rates on 40-year loans tend to be a touch higher than mortgages with shorter payoff schedules. The cash savings -- for those pinching pennies monthly -- comes from postponing the serious repayment of the loan balance.
But this is an age where house payments smack many wallets. So 40-year loans become a small but symbolic slice of the loan trade struggling when local shacks sell for six-hundred grand.
To meet various needs, the industry even cooked up numerous flavors of 40-year loans to choose from.
"You've seen more people come up with very creative products due to the rapid rise in values in an effort to get people into homes," says Sam Marzouk, president of Irvine's Argent Mortgage, a division of loan giant Ameriquest.
Let's scope out the 40-year field (and note that I'm making gross simplifications).
I'm aware there are numerous variations -- fixed and adjustable deals plus hybrid mixes -- with nuances.
Nevertheless, we'll start with the straight 40-year loan -- pay the loan off in 40 years, not the traditional 30.
Such setups were trendy back when folks last thought housing was extremely pricey: the late 1980s.
Hey, fads come and go. Why? Savings are slim.
Consider a basic choice: a 40-year, fixed-rate deal vs. a traditional 30-year loan. You'd save about $150 monthly on a $500,000 mortgage.
That's real money -- especially to a household on the financial brink. But it's no huge upfront windfall.
For that skimpy payment break, though, this 40-year loan's extra decade of payments equals roughly $300,000 in added interest charges.
"It's not a great value proposition for borrowers," says Amy Crews Cutts, an economist with government-backed mortgage buyer Freddie Mac. "These are ways that lenders are trying to fight a losing battle against the effects of rising rates on affordability." To expand the 40-year deal's savings, we get twists.
So-called "40/30" deals meld traits of two loan maturities. These present some long-term challenges.
These hybrid deals are peddled primarily by subprime lenders that work with borrowers who have risky financial profiles.
At Option One Mortgage in Irvine, a 40/30 loan is a 30-year deal where you pay off the loan at a 40-year mortgage's slower pace.
Such savings motivated 22 percent of Option One's borrowers in December to choose a 40/30 deal. That's more activity than the once-hot interest-only mortgages, where borrowers further delay "amortizing" or reducing the amount owed on the home itself.
"What we're trying to create is a more affordable loan, but still have an amortizing loan," says Option One's Jim Barto.
The catch is that when 30 years are over, these 40/30 borrowers must pay the remaining loan balance. This balloon payment is roughly half the original mortgage.
Hey, who stays with a loan for 30 years anyway?
Argent Mortgage thinks people worry about such a harsh possibility. So their 40/30 spin precludes the balloon payment by essentially splitting the loan into two: The first 10 years offer those discounted 40-year payments.
For the last 20 years, the loan is repriced -- or amortized, in lender lingo -- to completely pay off in a 30-year life.
By my math, assuming steady rates, the monthly payment would increase by about one-fifth after 10 years.
On a hypothetical half-million-buck loan, that translates to saving nearly $150 a month for a decade then seeing your payment go up by roughly $500 for the next 20 years. Hey, who stays with a loan for 10 years anyway?
Choosing a 40-year loan won't save you a bundle. Or let you buy a mansion (unless you can already afford a mansion.) Clearly, these loans can make that monthly mortgage check less painful to write.
And an added blessing is that you're saving some cash and still shaving the loan balance -- though that debt reduction is modest in the loan's early years.
That's a plus when you look at other, more troublesome mortgage-pruning tricks. For example, interest-only loans delay trimming the mortgage for two years or more. And so-called "Option ARMs" offer a choice of repayment schemes and actually let folks borrow more to make their payments.
Basically, 40-year loans are the least of three evils for average folks.
Outsmarting dubious competition isn't great praise.
These 40-year deals are "a forced way of savings," says Harvey Garte, a mortgage broker from Back Bay Funding in Newport Beach. He prefers his clients choose traditional 30-year fixed-rate deals.
"Option ARMs have been abused," says Garte of his mortgage pet peeve. These borrowers "start out with best intentions ... and they end up making minimum payments causing deferred interest" that boosts the size of the loan's balance.
Used properly, a 40-year loan's not a bad choice.
But if you knew that, you're a financial sharpie who's long turned the page on this column.
If you really need a loan like this, you may have other financial issues that require attention.
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