Can a 40-year mortgage make American home ownership more accessible, as many homebuyers are succumbing to affordable obstacles exacerbated by spikes in mortgage rates? ??
That’s the possibility raised by HM Magazine Housing Wire Ranch & Learn Series Following this spring’s announcement that the Federal Housing Agency is adding products to help homeowners struggling to change their mortgages this week. Otherwise, 40-year mortgages for buyers are not widely available.
However, experts warn that the use of long-term mortgages has its own drawbacks and may not cover all of the homebuyers’ worries.
“The long-term downside is the fact that homeowners build stocks more slowly,” WSFS Mortgage President Jeffrey Ruben told Yahoo Money. “The question is whether the cost of rising interest rates and delays in equity building is worth increasing the amount of mortgages the borrower receives.”
Loss mitigation tool
In the United States, 40-year mortgages were primarily a loss mitigation option in the United States to help homeowners avoid mortgage defaults. A 40-year loan change can be combined with a principal grace. The goal is to prevent defaults.
“The Department of Veterans Affairs (VA) has a 40-year loan change program offered to homeowners to combat the collapse of subprime mortgages. Hope for a homeowner program“Angel Hernandez, Head of Industry and Regulation at Stavvy, told Lunch & Learn participants. “You receive your current loan and redeem it in up to 480 months or 40 years — you will achieve a much lower monthly payment for the homeowner.”
In April, FHA 40-year loan change program For homeowners suffering from mortgages for COVID-19. FHA aims to permanently add standalone options to its mitigation. The move has cast doubt on some of the industry as to whether the program can be extended to homebuyers who cannot afford to buy in this highly competitive home market.
“Getting pre-approval for a mortgage is harder than it used to be.”
Last week, 30-year fixed-rate mortgages jumped to 5.78%, the largest weekly amount in 35 years. This is the highest level since November 2008. Since the beginning of the year, interest rates have risen by more than 2.5 percentage points. It creates additional barriers for homebuyers, especially first-time homebuyers facing a shortage of properties for sale and rising double-digit home prices.
“It’s harder to get pre-approval of mortgages than in the last few years because of rising home prices and rising interest rates,” John Sterns, senior loan officer at American Fidelity Brokerage Services, told Yahoo Money.
A 40-year mortgage is an “interest-only loan”
Enter a 40 year mortgage. A 20% drop in $ 400,000 homes (nearly the median of existing homes) at a 5.75% rate means a 30-year fixed mortgage payment of $ 1,864 per month. At the same rate, 40-year fixed mortgage monthly payments are reduced by 1,702, or $ 162.
“A 40-year FHA mortgage may sound daunting to many homebuyers, but it may be suitable for use in qualifying,” Stearns said.
However, according to mortgage experts, there are drawbacks.
Scott Sheldon, branch manager of the New American Funding, told Yahoo Money, “It’s a virtually interest-only loan that pays very little principal and is gradually beneficial.”
Cumulatively, the interest you will pay will be much higher. For example, in the previous example, the total interest paid on a 40-year-old mortgage is $ 145,750 more than the total interest paid on a 30-year fixed mortgage.
Also, as one of the main goals of home ownership to build wealth, creating home assets will take much longer. Fixed-rate mortgages are structured so that the first payment is primarily interest and the later payments are primarily principal repayments. With a 40-year mortgage, it takes time to cut the principal and build equity.
“You’re just stepping on the water economically,” Sheldon said. “You’re always paying for your home, so you can’t move you forward like a 30-year fixed-rate mortgage. There’s only a small profit in the long run.”
And what options remain if homeowners face financial problems?
“There may be scenarios where that might make sense, but … what if a homeowner with a 40-year mortgage has financial difficulties in the future?” Hernandez Said. “The goal of a 40-year loan change was a loss mitigation tool to help homeowners when they needed a servicer.”
Ronda is a senior reporter on Yahoo Money’s personal finance and a lawyer with legal, insurance, education and government experience.