Soaring housing prices are convincing some homebuyers to take on 40-year mortgage loans, which can reduce monthly housing payments but increase the amount of interest paid.
Heather MacKenzie, a broker who owns Orem-based Ideal Home Loans and also a residential mortgage regulatory commissioner with the Utah Division of Real Estate, said lenders are once again promoting 40-year mortgage products, which have been around for a number of years.
MacKenzie estimates that about 15 percent of her loans this month will be 40-year mortgages.
"I would say the public doesn't know too much about them," MacKenzie said. "They know more about 30-year and interest-only loans. The lenders are just starting to get it out where they are available."
A 40-year mortgage appeals to some homebuyers as an alternative to popular interest-only loans. It allows buyers to keep monthly payments low while also paying down principal, according to Pierre Alley, a loan officer with Salt Lake-based Western Fidelity Mortgage.
Aaron Earnest, co-owner of Investment Lending Inc. in Orem, pushes niche mortgage products. About 10 percent of the company's business is made up of 40-year option adjustable-rate mortgages. The 40-year option ARM lowers a homebuyer's monthly payment even further through negative amortization.
Earnest, 34, closed last week on an $855,000 house located in the Provo Riverbottoms. He financed the home using a 40-year option ARM. His monthly payments will be roughly $2,300, not including taxes and insurance.
"My wife is very excited," Earnest said. "Of all of the loan choices that exist, the one that most perfectly meets our objective — which is to give as little to the bank as possible — is this 40-year option ARM."
Under a traditional 30-year fixed mortgage at 6.5 percent, Earnest's monthly payments would have been roughly $5,404. The money saved, he said, will be put toward personal investments that include property, municipal bonds and hard-money lending.
While a 40-year mortgage works for Earnest, he is quick to acknowledge that the product is not an excuse to "go live the high life."
"We discourage anyone getting into this type of a program if they wouldn't otherwise qualify for the equivalent 30-year fixed mortgage," Earnest said. "If somebody doesn't qualify for this, we'll get them into the best interest-only scenario until their application is strong enough to get one of these option ARMs."
Alley believes 40-year fixed-rate mortgages are not the right choice for most homebuyers.
"There's a couple of drawbacks in my opinion," Alley said. "The interest rates that you are going to pay for that program are typically higher than just your straight 30-year mortgage. So you're paying a slight premium right now for that 40-year mortgage. I've seen it as high as 3/8 to 1/2 percent above a straight 30-year fixed. That takes away some of those benefits of extending the term of the loan."
However, even at a higher interest rate, the 40-year mortgage lowers a homebuyer's monthly payment.
For example, a $200,000 fixed-rate mortgage at 5.75 percent costs $1,167 a month on a 30-year payoff schedule. The monthly principal and interest payments on that same loan drop to $1,135 on a 40-year schedule carrying a fixed interest rate of 6.25 percent, according to Bankrate.com. However, a borrower will pay roughly $14,000 more in interest on the 40-year mortgage after 10 years compared to a 30-year mortgage.
Debbie Goldstein, executive vice president for the Center for Responsible Lending in North Carolina, said 40-year fixed mortgages can be useful in improving affordability by reducing monthly payments and helping qualify people for buying a home.
"The concern with them that borrowers should be aware of is that they build equity much slower and pay off the balance much more slowly," Goldstein said. "The primary concern would be coupling a 40-year mortgage with other layers of risk. For example, coupling a 40-year mortgage with some kind of interest-only or option payment ARM where you are also taking on the risk of interest rate fluctuation and building equity at a slower rate. That would be much more risky to the borrower and could put them at risk of not being able to afford the loan."
Yet Goldstein acknowledges that for some people, like Earnest, who have the discipline to invest the savings, the 40-year option ARM makes sense.
In October 2003, Fannie Mae, which operates under a congressional charter and buys mortgages, began a pilot program in which it started purchasing 40-year mortgages from credit unions.
By June 2005, Fannie Mae began purchasing the product from all of its seller servicers, according to Betsy Hildebrandt, a spokeswoman for Fannie Mae.
"Depending on the borrower, the 40-year mortgage might make sense for a first-time homebuyer who is trying to keep their payments down," Hildebrandt said. "It's not for every borrower, and like any other mortgage product it has advantages and disadvantages.
"For some borrowers the longer amortization period could make the difference between owning a home versus not owning a home."
Daniel Mauer, owner of Madison Mortgage in Heber City, cautions people against longer-term mortgages and option ARMs.
"Isn't the mortgage really designed to favor the bank?" Mauer asked. "Everybody wants to become an earner of interest and not a payer of interest. You can't delay the inevitable forever. Eventually you're going to have to pay off your house.
"All the people I know that own their house free and clear, they're much further ahead financially than the people I know that are trying to use their equity in investments."
E-mail: danderton@desnews.com