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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Five Facts Not to Take Out a Business Loan

Every business needs extra cash from time to time, and there are plenty of good reasons to take on debt: to launch new products, expand your business, or purchase needed inventory. But there are also plenty of bad reasons to take out a loan. Here are five.

1. To launch a new business idea before you have thoroughly researched it. Fads come and go; the goal is the find one that sticks. Before you decide to buy into the latest fad concept, spend some time doing market research and deciding whether or not the concept is a good match with your experience and interests. Many people think that owning a restaurant is glamorous but find out later that it is very hard work. Do your homework before you take on a serious financial commitment. Should You Personally Guarantee a Loan to Your Business?

2. Your credit cards and lines of credit are maxed out. If you have exhausted all other available credit, maybe taking on more debt is a bad idea. When lenders see that you are overextended, you will likely be required to secure the loan with assets. If you are having difficulty paying your existing financial obligations, you are entering risky territory by gambling with your facilities, inventory, equipment, or even worse, your own house. Read more about Cleaning Up Your Company's Bad Credit Profile.

3. To make an impulse buy you can’t afford. Perhaps there is a new technology or machinery you think would benefit your business, or maybe you want to remodel or upgrade your facilities. While all of these things may prove advantageous to your business, you won’t be able to reap the rewards if you have leveraged all of your assets and the extra profits you make go toward repaying the loan. If the idea doesn’t bring in extra revenue, you are still responsible for paying back the loan. If you used assets to secure the loan, you may end up without a business at all.

4. You saw an advertisement or received an email about unbeatable interest rates. As the old adage goes, if it sounds too good to be true, it probably is. And on the outside chance that it is true, just because you can get a great interest rate doesn't mean you should.

5. You want to consolidate your debts but haven’t learned how to budget. Maybe your company is going through a tough time, or maybe you have mismanaged your company’s finances and are now looking to consolidate all of your debts. Debt consolidation may ease the pressure temporarily, but you need to address the underlying problem if you want your business to succeed.

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New Refinancing Plan From Ohio For Distressed Home Owners

The Ohio Housing Finance Agency will issue $100 million in taxable municipal bonds in April as part of a refinancing program to help homeowners faced with foreclosure.

The program, offered through OHFA's 185 lending partners throughout the state, will provide 30-year fixed-rate loans for homeowners burdened by adjustable rate or interest-only mortgages or faced with circumstances like unemployment and divorce.

The bonds should provide assistance for about 1,000 loans (average loan amount is $100,000 per home) at about a 6.75 percent interest rate.

Loans are reserved for those residents with income up to 125 percent of the median gross income of their county, ranging between $73,000 and $84,000. Homeowners will be required to attend face-to-face counseling before a loan can close.

With enough demand, the program could provide up to $500 million each year through additional bonds and financing.

The program should help Ohio reduce its foreclosure rate, ranked highest of the 50 states in 2006, according to the Mortgage Bankers Association. The state also had the highest rate of subprime loans in foreclosure.

Residents can visit ohiohome.org beginning April 2 for more information on income limits and participating lenders.

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Mortgage applications for Rose U.S. home purchases and refinancing Says The Mortgage Bankers Association

Mortgage applications for U.S. home purchases and refinancing rose last week when long-term borrowing costs dipped, an industry trade group said Wednesday.

The Mortgage Bankers Association's seasonally adjusted index of mortgage applications increased 3.2 percent to 626.1 in the week ended Feb. 23, up from this year's low of 606.6 in the prior week.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, declined 0.03 percentage point to average 6.16 percent, the lowest since it hit 6.13 in the year's first week, according to the MBA.

The MBA's seasonally adjusted purchase index, seen as a timely gauge of home sales, rose 5.2 percent to 401.3 in the latest week, it said.

The group's seasonally adjusted refinancing index advanced 1.2 percent to 1,943.5.
Home price slump continues

The week's results are adjusted for the Presidents Day holiday.

On a four-week moving average, the seasonally adjusted market index is down 0.2 percent to 625.6 and the purchase index is off 0.4 percent to 397, the MBA said.
Mixed signals

The state of the U.S. housing sector is critical for determining the health of the economy, most economists agree. Signals have been mixed.

Some economists suggest the swift slump following a record five-year surge in home sales and prices is near its end, while others say the correction has not yet been deep enough.

Sales of existing homes in January staged their biggest gain in two years, boosted by unusually warm weather, according to the National Association of Realtors on Tuesday.
Freddie Mac moves to avoid risky mortgages

The housing market is unlikely to enjoy a sustained upturn with a glut of homes on the market.

Inventories of unsold existing homes in January remained high at a 6.6 months' supply based on the current sales pace.

Builders for months have been slicing prices and offering incentives to lure buyers and pare inventory.

The national median existing home price fell nearly 5 percent in January to $210,600 from $221,600 the prior month, and was 3.1 percent less than January 2006, the NAR reported.

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