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For many of today's homebuyers, a 30-year mortgage sounds a lot like a life sentence: too long to even fathom. So, what if that life sentence just got extended? While 30-year mortgages used to be the limit, 40-year mortgages have recently come into vogue.
Forty-year mortgages have been around for a couple of years, but it has only been in the last eight to nine months that they have become viable loan products, says John Marcell, president of the California Association of Mortgage Brokers (CAMB). "It's a good product for some people, but it's not something everyone should get into," he says.
For potential homebuyers who are having difficulty qualifying for 30-year mortgages, the 40-year option could mean the difference between getting approved for a loan and not, Marcell says. The reason is simple: more time means slightly lower monthly payments.
For example, on a $400,000 loan, the monthly payment on a 40-year mortgage is about $200 less than on a 30-year mortgage.
"It boils down to if this is the house you want and this is what you qualify for, then this might be the best product for you," Marcell says.
Forty-year loans can also work well for people who have extra money and want to invest it in multiple properties, says Bob Ivan, president of America One Mortgage and Financial Services Inc. in Modesto. By choosing the longer term, investors can spread their cash around and make multiple low payments. "It's all about cash flow," he says. "It gives you a lot more options."
Marcell almost always recommends the longer term over adjustable-rate mortgages. "To me, an adjustable-rate loan can be a disaster waiting to happen," he says, repeatedly mentioning the "13th month" when rates on adjustable mortgages can jump and increase homeowners' monthly payments by hundreds of dollars. "Some people just don't understand that their payment will accelerate," he says. "They are lulled into a false sense of security by getting a low initial payment." With a 40-year fixed-rate loan, there won't be those surprises. The payment amounts are constant.
Homeowners can always refinance and almost all do, Marcell adds. "Nobody keeps the loan for the maturity of it. It just doesn't happen," he says. In the United States, the average amount of time consumers keep their mortgages is seven years. In California, it is five years, and in recent years, California's average has been as low as two years, Marcell says.
He also recommends the longer-term loans to people who have seasonal or fluctuating income and those who aren't very diligent about saving their money.
So far, Marcell, who is also a broker and owns Better Mortgage Brokers Inc. in Uplands in San Bernardino County, has written about a dozen 40-year loans, he says. Requests for those loans keep coming in and Marcell only ex-pects their popularity to rise as more people find out about them.
Ivan agrees that the clients are there and increasing in number. "We're seeing more and more people show interest in (40-year mortgages)."
Is it just a matter of time before 50-year mortgages become the rage? Yes, Marcell says. "It's already being talked about. It's kind of like the 40-year mortgage was 12 to 18 months ago - a lot of people thought that was crazy, and now (40-year mortgages) are here," he says.
Ivan notes that one bank already offers a 45-year mortgage. "If there's already a 45, there's probably a new 50 (-year mortgage) down the road," he says.
So, will 50 years be the limit? Probably not, Ivan speculates, adding, "Don't forget. Japan has a 100-year mortgage."