The 40-Year Mortgage Is Looking More Inviting


The 40-year mortgage is popular again but financial experts warn they come with a lot of risks and potentially no payoffs.

Needham Bank, with 14 locations in Massachusetts, promotes 40-year mortgages.

“Owning a home has never been so easy,” is the term they use on their website.

Before the crash of 2008, 40-year mortgages were a popular option. Today, the expenses of getting into a home are driving buyers to consider signing up for loans they won’t pay off until after they are 65 years old.

Roy Black is an Economics Professor at the Emory University Goizueta School of Business and has been examining real estate finance for decades. It is his opinion that negotiating a 40-year mortgage can be a good road to take in homebuying but warns consumers to be careful.        

Black explained why bankers are quick to offer 40-year mortgages again.

“It’s not a new idea,” Black said. “But they have opted to dredge it up again in light of three things. One being the expense of houses, the relative scarcity of houses, and the prospect of rising interest rates. So, they dug this one out of the closet.”

Buyers are tempted to listen to the pitches about a 40-year mortgage because they are a way to cut down on the monthly payment of a home.

With inflation being the highest it has been since the early 1980s, many families are having to take every bit of cost into account when looking to finance a home.

“Two things,” Black said. “It has actually been around a long time and it’s certainly not the one that will give you the very lowest monthly payment, that is an interest-only loan.”

Black is not optimistic that a 40-year mortgage is the way to go for home buyers. He says what happens during a time in which interest rates are higher, houses can be tough to sell.

There are already signs that buyers may catch a break on home prices this year. Redfin reported on May 26 that nearly one in five home sellers dropped their asking price during the four-week period ending May 22.

At 19.1%, that is the highest level of sellers dropping their asking price since October of 2019, before the pandemic-driven housing frenzy, Redfin reported.

Historically, there have been few recessions in the United States that have, in part, been caused by loose underwriting standards.

The housing bubble that triggered the 2008 crisis was caused by borrowers being placed into unaffordable mortgages through cheap debt, predatory lending practices, and financial engineering.

“It appears we are heading in that direction,” said Black. “That being said, if you really, really want to get into a house and you are stretching just to find one where you can afford a payment, a 40-year mortgage may be the right thing for you.”

This is where the risk comes into play. Potentially.

“It lowers your payment and that gets you into the house,” Black said. “And since they qualify you for the loan based on your income and it lowers your payment, going with a 40-year mortgage may be your only option. You could go with a variable rate 40-year or a fixed-rate 40-year. Either will lower your monthly payment and that is the good news.”

Black said the bad news is a variation of ‘Watch what you wish for, you just might get it.’

“As a borrower, you are put at greater risk of default. If your income goes down, or your interest rate goes up you have really stretched yourself out thin with a 40-year mortgage. Personally, right now I would not consider a 40-year mortgage. Houses are greatly overpriced. It wouldn’t take much to go underwater if the market improves. One thing you can always depend on in the real estate market is it will change,” Black said.

Black said the big curse of risk in a 40-year mortgage is if we get a spike in apartment construction.

Many US metro areas are already seeing a rise in apartment construction and if the costs for rental lowers, that will be an inviting option again for people.

Then the scenario shifts and people will begin looking at what they are spending for an overpriced house versus what they could be spending on a reasonably price apartment, condo, or townhome.

Black said when that happens with the value of homes dropping under this scenario, that puts people who got a 40-year mortgage at a 905 to 95% finance ratio underwater. Immediately.

The risk for the lender is a lot of people will likely choose to just let the house go back to the lender.

Then the stage may be set for another crisis where foreclosures increase, and the prices of houses drops again. Like we saw in 2008 when the market crashed from, among many factors, derivative securities problems.

“I am not saying it is going to happen,” Black said. “But the conditions are there for a drastic drop in the future.”

Jerry Stover of Homeowners Mortgage is not so sure the 40-year mortgage will make a quick comeback.

And if they do, the option may not grow very quickly. One factor being not everyone in the market would be able to get one as they would have to be Wall Street backed and not government backed. For now.

“I think maybe as time goes by here and our population grows, these may make a comeback,” Stover said. “Going from a 30-year to a 40-year fixed is not going to reduce your payment all that much. Now going from a 30-year fixed to a 50-year certainly would.”

Stover points out that a first-time homebuyer may not get to try the option at all because 40-year mortgages are not backed by the government.        

“I did see where the Biden administration has been leaning on FHA to allow remodifying a loan to a 40-year loan,” Stover said. “It has to be a documentable reason that your ability to pay the current mortgage has changed. Job loss or severe injury could be a reason, divorce is not usually a reason. If we end up having a continued recession, we could end up seeing more cases of that.”

In April of this year, FHA did pull the trigger to allow remodification of a loan to 40 years for those who have been significantly financially impacted by the Covid-19 pandemic.

Details can be found here.

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