Enter…The 40-Year Mortgage

The formerly niche market 40-year mortgage has now officially entered into the mainstream. This is good news for those who want to buy a home in a high-cost housing market, but need lower payments to improve cash flow or to qualify.

Even a year ago, financial institutions had few to no requests for this product, but the numbers are up. To adapt to the rising borrower demand, lenders are accommodating in any way they can. But these loans aren’t for everybody, and borrowers should be fully aware of the minuses as well as the pluses of a 40-year mortgage.

By way of an example, with a conforming loan of $417,000 at 6.25%, the monthly principal and interest payment would be $2567. A 40-year loan for the same amount at the same interest rate would be $2367. The savings might appear negligible, but even $200.00 can be a ratio tipper for borrower qualification.

However, the interest rate is not typically the same. It’s likely to be higher than a 30-year loan because of the longer-term risk — up to .375% higher according to Fannie Mae. If you add .25% to the example above, the payments jump to $2,441 and the monthly savings are down to $126.00. If lower payments are the key benefit sought by the borrower, an Adjustable Rate Mortgage (ARM) might be a much better way to go.

The greatest benefit of the 40-year mortgage is in the high-end home market. With homes at $750,000 and above, it’s often the only way a buyer can get into one. But buyers must be aware that the monthly savings are virtually erased by the term of the loan. Total payments for the 30-year mortgage would equal $924,315. For the 40-year mortgage, $1,136,393.

In the end, all loans can be a gamble. It's up to consumers to determine the level of risk they can accommodate. Before you apply for a loan, ask your real estate professional to help you crunch the numbers, adopt a long-term strategy, and make an informed decision as to what’s best for you.

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