40 Year Mortgages
The 40-year mortgage, for years a niche product, has gone mainstream. Whether it earns widespread acceptance is another matter.

^ back to top

It's not a sure bet that 40-year loans will catch on for at least three reasons.
First, the interest rates are slightly higher -- usually an eighth to a quarter of a percentage point. Second, tacking 10 years onto the payment schedule doesn't save all that much money every month. Third, interest-only mortgages have exploded in popularity in the last two years, and they offer even lower initial monthly payments than 40-year loans.

They might attract borrowers who are on the edge of qualifying because of the lower payments. Generally, I don't want the monthly mortgage payment to exceed 36 percent of the borrower's monthly income and for all debt payments (including mortgage) to exceed 40 percent of income.

Some buyers might barely stray outside of those guidelines when applying for a 30-year mortgage -- for example, if the house payment would be 29 percent of monthly income. In such a case, a 40-year loan might allow the borrower to qualify by sliding under the 28-percent threshold. We're talking small differences, though: On a $200,000 loan, the monthly savings would amount to less than $64 on a 40-year, fixed-rate mortgage at 6.25 percent compared to a 30-year fixed at 6 percent. And the monthly savings shrink if interest rates rise.

^ back to top

With interest rates expected to rise, and with property values soaring on the coasts, the 40-year loan might make homes affordable to a few more middle-income buyers, Cutts says."We don't in any way think the 40-year is going to eclipse the 30-year, but it does have its place and we think it's going to be appealing to some borrowers."

They will compete with interest-only mortgages. Those, too, were a niche product until home prices began zooming in parts of the country three or four years ago. Now interest-only loans occupy a big chunk of the mortgage market in high-price cities as buyers hunt desperately for ways to afford absurdly expensive houses.

Most interest-only loans are ARMs. Forty-year ARMs will have comparable interest rates to interest-only ARMs, but payments will be higher because the borrower pays principal in addition to interest.

Forty-year ARMs I buy are hybrid adjustables with initial rates that last three, five, seven or 10 years, then adjust annually afterward. Borrowers can choose to have the loans indexed either to the LIBOR (London Interbank Offered Rate) or the CMT (constant maturity Treasury).

50 Year Mortgages

50 year mortgages have just become available in the past few months with a select number of lenders. We have partnered with as many of these lenders as possible in an effort to give you incredibly low monthly payments on large mortgage amounts.

Whether you'd like to purchase a new home or refinance an existing mortgage, the 50 year term is a great choice for home owners who would like to take hundreds of dollars off their monthly payments.

Receive A Quote By Phone - (310) 791-2297

Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage.

With an interest-only mortgage, the minimum monthly payment doesn't put any money toward principal. A payment-option ARM goes a step beyond that: In some circumstances, the minimum monthly payment doesn't even cover the interest accrued that month. You make a minimum payment at the beginning of the month, and four weeks later, you owe more than you owed before the payment. This condition is called negative amortization, or "going negative."

^ back to top

Forgive borrowers for thinking that it makes better sense to amortize a loan over 50 years than to get an option ARM or interest-only mortgage.

Regulators and consumers worry that foreclosures will surge in coming years, especially among homeowners who got interest-only and payment-option ARMs. There are two markets for this, one is if they're looking to purchase a home, because of how expensive housing is, they'll consider this loan. And the other is payment-option ARMs -- borrowers are making minimum payments and they're starting to panic a little bit and look for vehicles to get out of these loans.

^ back to top

A 50-year mortgage is an alternative to an interest-only loan, but it's not necessarily the best option.

A 50-year loan has lower monthly payments, but the total cost is astronomically higher than that of a 30-year mortgage because you're stretching out the payments for two decades longer. It's impossible to guess how much higher because the rate moves up and down annually for the last 45 years of the loan.

Let's compare a 30-year fixed-rate loan with a 50-year fixed. For a 30-year loan of $300,000 at 6.5 percent, principal and interest cost $1,896.20 per month. A 50-year loan for the same amount and at the same rate costs $1,691.15 per month in principal and interest.

The 50-year loan costs $205 less per month, but the payments stretch out for 20 years longer and will cost a total of $332,058 more.

An interest-only loan at 6.5 percent would cost $1,625 per month for the first 10 or 15 years, and then the payment would jump.

Few people live in one house for 30 years and hardly anyone for 50 years. A lot of home buyers move into a house knowing that they will move out within five years. Most of those people are well-suited for lower-rate hybrid adjustable mortgages.

^ back to top