The 40-Year Mortgage Powers Home Buying
It's no secret that home values have been climbing in many
areas. In a few cities home prices haven't just gone up, they
have been launched into the stratosphere.
If you own property you just can't stop smiling. The size of
your home's equity may be matched only by the latest Power Ball
total. But what about the first time home buyer or those who
have a burning need for more space - the move up buyer?
Wages gains have not matched the increased real estate prices
and that is putting new buyers in a tight spot. The law of
market forces indicates that with fewer people able to buy a
home there will be less demand and home prices will begin coming
down, right? Wrong!
The building industry and booming home equity growth are about
the only things driving the fragile U.S. economy. The government
must keep the housing market healthy or risk being booted out of
office. Bush is keeping the ball rolling just as Clinton did
before him. Keep the voters passive in their snug new homes.
Enter the 40 year mortgage.
An ad in the financial section of a major city's newspaper
shouts "Ask About Our 40 Year SmartChoice Mortgage!" The
advertisement goes on to say you have your choice of an
adjustable rate of 1%, or a fixed rate of 1.75% for 5 years.
Look what that means. You can stroll in and borrow $400,000 for
a monthly payment of just $1,012 with zero closing costs!
Hurray, everyone can again afford to buy a home. Yeow, this ad
even says they will loan you 107% of your new home's value.
Shouldn't we get a little nervous when we see that kind of ad?
Won't the 40 year loan allow people who really can't afford a
home to shoulder that financial burden? And if we may be a real
estate bubble as some claim, doesn't this make buying highly
leveraged real estate down right dangerous?
Until now forty-year mortgages have been rare because lenders
couldn't sell the darn things to investors through the
government-sponsored enterprises Fannie Mae and Freddie Mac.
Those 40 year loans had to be held by the lenders, tying up
their money for a long time. Now that's changed.
Both Fannie and Freddie are passing out cash for those babies
like they are running their own money printing presses. Wait a
minute, the government IS running the presses. Some would say,
just like Parker Brothers prints Monopoly money. It's easy to
see that the primary advantage of a 40-year fixed-rate mortgage
is to make monthly loan payments more affordable and avoid the
risk of an adjustable rate mortgage. The 40-year fixed rate also
appeals to buyers with small down payments.
Now stop and look at the numbers. You will see that the
difference in payments may not be that significant. Take a
$200,000 mortgage financed for 30 years at a fixed rate of
5.75%. It would have a monthly payment of $1,167.15. Stretching
the loan term by an additional 10 years (40-year mortgage) only
reduces the monthly payment by a little over $100 to $1,065.78.
There's more: Some of benefit of those lower monthly payments is
offset by the higher interest rate that comes with the 40-year
loan. Rates on a 40-year fixed are often one quarter to one half
of a percentage point higher than a traditional 30-year
fixed-rate mortgage. Loans with longer terms carry higher rates
because of the added time frame where a default may occur and
because lenders require compensation when their money is locked
up for the longer time.
One of the benefits of the recent increase in homes values is
that homeowners turned much of their equity into cash through
refinancing. Homeowners spend that cash and that money keeps our
economy going. With 40-year loans real estate equity grows at a
snail's pace a home's value appreciates at a normal rate of 3%
to 5% yearly. For the first-time home buyer who plans to
eventually move up to a larger home, this slow pace of equity
accumulation is a liability.
Now add zero closing costs to the mix. In most areas, closing
would run about $2,000 in fees to refinance a $200,000 mortgage.
Appraisal - $300. Settlement Fee - $300. County recording fees -
$400. Underwriting fee - $300. Processing fee - $200. Title
Insurance - $750. The list goes on.
Without zero closing cost programs, the home buyer would have to
wait until interest rates reached a level low enough to justify
the closing costs. Remember that closing costs must be low
enough to allow the buyer will recoup those costs in a
reasonable period of time. If he plans on being in the home for
five years and it takes seven years to recapture the closing
costs it's a bad deal. We must admit homeowners don't see to be
very concerned about such things.
No body gets something for nothing, especially with mortgage
lenders. A zero cost loan program is financed by a loan with a
slightly higher interest rate. You can juggle the numbers all
you want, but the borrower always pays and the lender always
earns. The 40-year mortgage will allow our economy to keep
rumbling along this bumpy road for at least a short trip. Let's
hope we don't wind up at a dead end.