Tuesday, July 10, 2007

Can the 40-Year Mortgage Save You Money?

I hear the question asked all the time, "How much money can I save with a 40-year fixed rate loan?" The answer is simple, every time: None. In fact, over the life of a loan you will end up spending much more than you may have thought. While it may seem reasonable could save $100.00 each month on their mortgage payment, a "snail's pace" doesn't even seem to begin to describe the rate at which a borrower would build equity on their new home. The truth of the matter is, that the higher interest rates and over-priced housing has caused an alarm bell to go off with lenders, and new and inventive ways to keep sales up have become necessary to keep the industry afloat. Does it help borrowers? It helps keep the monthly payments slightly more affordable, but when it comes time to resell, financial problems could surface. A simple shift in the economy could send some 40-year borrowers into foreclosure instead of a profitable sale; as interest rates continue to climb, sales prices in some areas deflate, the 40-year loan has great potential to turn upside down - and fast.

Freddie Mac has introduced a line of 40-year mortgage products with a catchy sales pitch: "40-Year Home Possible Mortgage: More House with Less Income", and boasts that it has "standard low down-payments, flexible credit underwriting, and conforming conventional rates to give cash and credit strapped borrowers even more buying power." New homeowners are in the most danger from this type of loan, as most of them believe that in the long run, this type of loan will actually help them. Remember, 2007 is when many of the trillions of dollars of creative ARMs will do their thing - adjust. Do we really need to put more homebuyers at risk of foreclosure by "loosening" the credit and income standards even more?