New 40-Year Mortgages
Low interest rates in recent years have given more and more individuals the opportunity to purchase a home. Home ownership, part of the American dream, fuels a strong economy.
However, due to shortages of available housing in some areas and other economic factors, real estate prices have soared upward, even as interest rates went down. The lower rates and newer, flexible mortgage programs, such as interest-only and pay option ARMs (a type of adjustable rate mortgage), continued to allow people the ability to buy homes, despite rising real estate prices.
Now that interest rates may begin to rise and increased housing costs show no signs of slowing, it becomes questionable if homeownership will still be possible for the average American.
Fannie Mae’s response to this scenario was the announcement on June 1st it will begin buying 40-year mortgages from lenders. The 40-year programs function just like a 30-year product, the payments are simply spread over an additional 10 years.
Will it be cost effective? Consider that a $250,000 mortgage at 5.75% for 30 years is $1458.93 P&I per month. The same $250,000 mortgage for 40 years at 6% (40-year rates are generally .25 point higher than 30-year rates) is $1375.53 per month. The savings? A mere $83.40 per month.
As few people keep a mortgage for 10 years, let alone 30, I doubt it will make a big difference in the long run. However, as I have cautioned before, it is still imperative for each individual interested in homeownership to carefully evaluate their personal debt threshold.
You still have to be clear about what you can afford and what you can’t. Whether the payments are over 30 years or 40, successful homeownership will depend on your being able to make those monthly payments comfortably no matter what other financial obligations arise.