40 Year Mortgage Loan - mortgagesfirst.com

40 Year Mortgage Loan
40 year mortgage loans have been around for a while but are becoming more common. After Fannie Mae's trial period, many lenders are now offering their fixed rate 40 year mortgage loan. Typically, lenders are making the product available with a charge of 1% of your loan amount. This is a charge to your closing costs and not to your rate. You can either get the same rate as on your 30 year term and increase your closing costs or pay a slightly higher rate (usually .25% higher) and we can pay the cost for you from an increased yield spread premium. The big advantage to a 40 year mortgage loan is the ability to qualify for a larger home without the risk associated with an interest only loan. You have the safety of a fixed rate, no issue of recasting to a higher payment at the end of the interest only period, and qualify for a larger loan. Lets look at a real world example. A recent client, making $40,000 with no other debt was qualified to purchase a home valued at $220,000. Unfortunately, he was unable to find anything in that price range that was suitable. When we looked at a 40 year mortgage loan, we found that he was able to move his qualifying amount up to $265,000 and he found the home he wanted.
Another product series using a 40 year mortgage loan term are the popular Option Arms. These products allow up to 4 different payment options, a minimum payment can be set to either a 30 or 40 year term, an interest only payment, fully amortizing 30 or 15 year terms. When we have a client who wishes to drive the minimum payment down to the lowest possible payment, the 40 year term is an excellent choice. If you go in this direction, you will need to pay attention to the amount of deferred interest you are accumulating but the deferred interest can be a wonderful tool in tax planning. We look at this feature as almost a free line of credit that can be used whenever needed. However, and this is an important point, an option arm can be a poor choice if you are in an area where slow job growth has created a very slow housing market. As you are adding to your mortgage balance if you choose the minimum payment, you may be eroding the equity in your home. For more information on the amount of price appreciation needed to offset deferred interest please see the page on concern over negative amortization.
Try our Option Arm payment calculator