What's next? The 40-year Mortgage!

[HenryTo]

Article from the WSJ:
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Fannie Mae Plans to Increase
Buying of 40-Year Mortgages

DOW JONES NEWSWIRES
May 11, 2005; Page D2

The 40-year mortgage, still a relatively rare choice for financing the purchase of a home, is about to get a big boost: Fannie Mae will be stepping up its purchases of these loans, providing lenders with an incentive to offer more of them.

Thomas Lund, Fannie's acting executive vice president of single-family businesses, told executives at a mortgage-banking conference last week that the company would be making the 40-year mortgage a standard product. A formal lender announcement will be issued at the end of the month.

Fannie Mae has been purchasing 40-year mortgages since late 2003 under a pilot program with 22 credit unions. While initial volumes haven't been huge, the company sees the product as a way to make homeownership more affordable as interest rates rise and house prices continue to appreciate.

By stretching mortgage payments out over a longer period of time, borrowers can lower their monthly payments, even though the interest rates on 40-year loans are higher than those for 30-year mortgages.

For example, for a $200,000 loan with an interest rate of 6% and a term of 30 years, the monthly payments would be $1,199.10; but a borrower could save $63.62 a month by taking out a 40-year mortgage. Even at a higher interest rate of 6.25%, the monthly payments would be just $1,135.48.

While the savings is relatively small, Fannie Mae spokeswoman Sandra Cutts said it could be enough to get some people into homes they otherwise couldn't afford. "Over the life of a loan, that could add up," she said. "The amount saved per month could be spent paying other bills."

There's a downside, of course: Borrowers end up paying significantly more interest over the life of 40-year mortgage than they would for a 30-year mortgage. They also build equity in their homes more slowly, since most of the monthly payments made in the early years of a loan go toward interest, rather than principal.

The Mortgage Bankers Association doesn't keep separate data on 40-year mortgages, but chief economist Doug Duncan says they represent less than 1% of all mortgage debt outstanding in the U.S. He said that's partly because most people don't stay in their houses for more than 10 years. Banks are also loathe to tie up their money for such a long period of time, potentially missing out on a big increase in interest rates.

But Mr. Duncan said some lenders will be more willing to offer 40-year mortgages if they know the loans can be sold to Fannie, freeing them up to lend more money.

While there are a suite of other products designed to make homeownership more affordable, including adjustable-rate mortgages and interest-only mortgages, 40-year fixed-rate loans could appeal to borrowers who plan to live in their homes for a number of years and want to avoid the risk that interest rates will rise significantly by the end of a five- or seven-year reset period on an adjustable-rate mortgage.

Write to Dow Jones Newswires editors at asknewswires@dowjones.com