Forty Year Fixed Mortgage
In the 1960s, twenty year mortgages were common. As housing prices rose, the benchmark became thirty year mortgages. The last five years of climbing housing values have brought about the forty year mortgage for people who simply cannot afford any thirty year formula that a lending institution can provide. Forty year fixed mortgages seem like a reasonable alternative to households with modest incomes and a desire to break into the housing market.
The use of forty year fixed mortgages ground to a standstill when housing values leveled out a year ago. However Fannie Mae has considered the potential value of the concept for the increasing numbers of Americans who cannot afford to buy a home with a thirty year note. The corporation has launched a pilot program with 21 credit unions around the country, helping to make forty year mortgages available by agreeing to purchase forty year fixed mortgages that meet their criteria, just as they do with almost all thirty year mortgages in this country.
There are many analysts that question the value of this pilot program, simply because the interest rate on a forty year fixed mortgage is going to be higher than a comparable thirty year note. Interest on the forty year loan will be .25 to .375 of a percentage point higher than on a thirty year loan. Real estate professionals are making the point that any savings realized over the life of the loan are erased by the higher interest rate.
One real estate trade publication ran comparisons on monthly payments for a fifteen year, a thirty year, and a forty year fixed mortgage based on Fannie Mae's criteria for a conforming loan. With a quarter of a percent difference in interest rates, the savings on the monthly payment was less than one hundred dollars - a payment that hovered around the $2,000 mark on a $360,000 loan. Obviously, with a forty year fixed mortgage you'll be making payments for ten more years. And the difference in total interest paid over the life of the loans is staggering - almost $200,000.
Forty year fixed mortgages seem to be considered a poor choice for a home purchase; the experts argue that you can do better with a 3/1 or 5/1 ARM. It is important to consider household circumstances on these loans, however. Some people feel they cannot afford to gamble on an adjustable rate and cannot afford or do not qualify for a thirty year fixed rate loan. For those people, the forty year fixed mortgage may be a reasonable answer, if for no other reason than it is the only way they can become homeowners.