Mortgage Financing - Taking A New Look

Brett Richards

Mortgage companies are always looking for a way to generate additional income, and with the real estate market taking a substantial decline, some lenders are now offering mortgage loans that will spread your payments out to 40 and 50 years, making them more affordable. Prior to these extended-term mortgages, the interest-only mortgages were touted as the way to go. Is this new wave of financing your home really a good deal?

Remember that interest-only mortgage loans weren't permanently interest-only. The buyer only had a certain period of interest-only payments, after which they must resume paying on the principle, which had grown during that time. Many families found themselves unable to pay the higher payments that came at the end of the interest-only period. Right now, we are seeing those interest-only loans having a much higher rate of foreclosure than the regular fixed-rate mortgages where the payment stays the same.

Now we have the birth of the 40- and 50-year mortgage. It's true you'll be spreading your payments out, but you'll be greatly increasing the amount of interest you will pay back, and you also will reduce your buildup of equity. These mortgages will makes it easier to buy a home in a high-priced area. But when we break it down, these ultra-long-term mortgages don't reduce monthly payments all that much when compared with a traditional 30-year fixed-rate loan. What these loans will do, though, is jack up how much interest you pay over time and dramatically slow down the rate at which you build equity.

Even with all the facts, the 40-year loans are becoming more common, and the 50-year mortgage is more a novelty item than anything else. Some experts have compared them to the 99-year mortgages that were briefly offered during Japan's ill-fated real-estate boom two decades ago. Forty-year mortgages, on the other hand, first appeared in the 1980s and then finally gained recognition in the U.S. last year, after Fannie Mae began buying them. (Fannie Mae and Freddie Mac buy the majority of mortgages in the U.S. and repackage them for sale to investors, so their stamp of approval is hugely important.) About five percent of mortgages in the U.S. now carry 40-year terms.

Some 40-year mortgages offer fixed rates for the entire term, typically charging about one-quarter percentage point -- more than a comparable 30-year mortgage. Some 40-year loans are ARM loans, with a rate that's fixed for a few years before becoming variable. This slightly lower payment could be enough to help you qualify for a somewhat bigger loan. Forty-year mortgages are typically sold to individuals who say they don't like the 30-year, because the mortgage payments are a little high, and they don't like interest-only because they will need to build some equity.

Consider this: If there's any chance you might hold onto one of these extended mortgages, making every payment until the term ends, rather than moving and refinancing -- then you'll really want to opt for the shorter-term loan. You'll pay a total of $398,334 in interest for a 30-year, $300,000 mortgage over the course of the loan. For a 40-year, the interest cost is nearly 50 percent higher: $591,725.

Many borrowers, though, have lost sight of the true costs of various mortgages as they pursue just the lowest-possible monthly payments or try to qualify for ever-more-expensive homes. If this describes you, you might want to:

# Consider your goals: for most people, homeownership is a way to build wealth.

# Match the mortgage term to your time horizon: You can help protect yourself from soaring interest rates by making sure your rate is fixed -- at least for as long as you plan to remain in the home.

# Settle for a less expensive home: Stretching yourself too thin to buy a house is a recipe for disaster. Even if no major systems break down, the routine costs of maintenance and repair can swamp anyone who's not prepared for them. Meanwhile, a high house payment might cause you to lose sight of other important goals, like saving for retirement, or to pile up credit-card debt as you try to stay afloat.

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