New Homes Magazine: Is the 40-Year Mortgage Right For You?

Is The 40-Year Mortgage Right For You?

by Robin Root, Broker Associate & Branch Manager, Platinum Mortgage

Over the past five years, Californians have realized that becoming a homeowner means spending more of their income on housing payments. While interest rates have remained historically low, home prices have steadily continued to increase. These home price increases have priced some families out of the housing market. Lenders understand this dilemma and are bringing back an old amortization schedule. The 40-year loan is back and gaining popularity. Here are some of the benefits of the 40-year mortgage program:

For many families struggling to make a higher than anticipated mortgage payment, the 40-year loan can save them a few hundred dollars a month. Take a look at the 30-year mortgage payment vs. the 40-year mortgage payment in the following example:

$450,000 @ 6% over 30 years $2697.97 P&I
$450,000 @ 6% over 40 years $2475.96 P&I

Total monthly savings $ 222.01 per month

These savings can help borrowers purchase a home that was once out of reach. Like most 30-year loan programs, the 40-year loan is structured to pay down both principal & interest. Although very little principal is paid in the beginning years of the mortgage, borrowers start making a small dent in the payoff amount. For homeowners who plan on staying in their homes 10 years or more, this is a great option.

40-Year Loans vs. Interest Only Loans
Over the past several years, interest only loans have been one way for home buyers to tackle increasing home prices. While the interest only loan is still a popular mortgage option, more lenders are adding the 40-year loan as another alternative for a lower monthly mortgage payment. There are many reasons why it makes sense to go with the 40-year loan as opposed to an interest only mortgage.

For starters, not all families will be moving, selling, or refinancing every five to ten years. For families who sell and/or refinance every five years, an interest only loan is not a bad deal since very little principal would be paid on an amortizing loan in a five year period. While frequent refinancing made sense over the past several years due to historically low interest rates, if rates rise as most experts predict, refinancing may no longer be of benefit.

Rising interest rates will also impact many interest only mortgage holders, as a large number of these loans are adjustable rate mortgages which will begin to adjust in the next three years or so. Borrowers who are struggling to make an interest only payment with an interest rate of 5.5% to 6.25%, may not be able to handle the payment once the interest rate increases. Some families may be forced to sell if they cannot afford the higher payment.

Qualifying for a 40-Year Loan
The credit standards are very flexible for 40-year loans. Because so many lenders are now offering this as a featured mortgage product, a number of credit alternatives are available. Whether you have perfect credit with scores in the high 700�s or tarnished credit with scores in the mid 500�s, this option is available to you. Lenders also have 40-year programs available to alternative documentation borrowers. From those who are able to supply W-2�s, 1040�s, pay stubs and assets, to borrowers who want a fast close while providing limited or no documentation, the 40-year loan is an option for all to consider.

The 40-year amortization schedule is not a new idea. Some lenders have been selling this mortgage option since the late 1980�s. California�s real estate market conditions and increasing home prices have renewed interest in this loan product. Whether you are a move-up buyer or a first-time buyer dreaming about becoming a homeowner, this is another great option to help you qualify for your new home. Speak with your lender for a pre-qualification or pre-approval today and review your options for a 40-year mortgage.

Robin Root, broker associate and branch manager of Platinum Mortgage, has over 15 years experience in residential mortgage loans and is a Real Estate Broker, California Department of Real Estate license #01103509. Platinum Mortgage offers a wide variety of loan programs and services including: Conventional, Jumbo, Interest Only, Stated Income, No Doc, 100% LTV, Zero Down programs, 2nd & HELOC�s, and much more. Contact Robin at (888) 399-5577 or via email at rrloans@pacbell.net. www.RobinRootLoans.com