News can be difficult to understand when headlines are flying around with very little context. For example, Apple released their new Apple Card Saving Account this past week, but a lot of the headlines just said Apple released their new savings account with a generous 4.15% APY. The keywords missing from most of those headlines are Apple Card, meaning you need an Apple Card to even get access to the savings account. In reality, Apple (and their partner Goldman Sachs) will make far greater money when you swipe your card than they pay you in interest. There’s no such thing as a free lunch.
However, this is an article about the 40-year mortgage. Similar to the Apple (Card) Saving Account news, I had to dig into the headlines to figure out a little more about what’s going on here. I am going to break it down because this is a little confusing.
What is a 40-year mortgage?
A 40-year mortgage is a type of home loan that has a repayment term of 40 years, instead of the traditional 30-year term. This extended loan term allows borrowers to spread out their payments over a longer period, which can help to lower their monthly payments. The longer repayment period, however, also means that the borrower will end up paying more interest over the life of the loan.
Who offers 40-year mortgages?
Not all mortgage lenders offer 40-year mortgages, but some do, and they can be a viable option for those looking to lower their monthly payments.
Why don’t all mortgage lenders offer 40-year mortgages?
Because they aren’t qualified mortgages.
Well, why aren’t they qualified mortgages?
Qualified mortgages (QM) are subject to certain requirements that make them safer and more affordable for borrowers. One of these requirements is a maximum loan term of 30 years. As a result, 40-year mortgages are not eligible to be qualified mortgages under the QM rule. One reason for this requirement is that longer loan terms can increase the risk of default, as the borrower is making payments over a longer period of time and may face more financial challenges. In addition, longer loan terms can result in higher interest charges over the life of the loan, which can make the mortgage less affordable for the borrower.
What are the benefits of qualified mortgages?
The main difference between a qualified mortgage (QM) and an unqualified mortgage is that QMs are considered safer for borrowers, and as a result, lenders who issue QMs receive legal protections. This means that if a borrower defaults on a QM, the lender is less likely to face legal repercussions than if the borrower defaults on an unqualified mortgage.
But I heard that the FHA is now providing 40-year mortgages, so what was that about?
The Federal Housing Administration (FHA) does offer 40-year mortgages, but they are only available as part of a loan modification program. A loan modification is a process in which the terms of an existing mortgage are modified in order to make the payments more affordable for the borrower.
How is a modification different from a mortgage origination or refinancing?
When you apply for a new mortgage through loan origination, you are starting a brand new loan with a new interest rate, term, and potentially a new lender. Refinancing also involves taking out a new mortgage, but with the purpose of paying off an existing mortgage. On the other hand, a loan modification involves making changes to an existing mortgage without completely replacing it. These changes can include reducing the interest rate, extending the loan term, or changing the type of loan, among other options. Loan modifications are typically offered to borrowers who are struggling to make their mortgage payments due to financial hardship, and can help to make their payments more affordable and prevent foreclosure.
So it seems like 40-year mortgages have no benefits, why do the exist?
Overall, the pros of a 40-year mortgage include lower monthly payments, which can make homeownership more affordable for some borrowers.
Give me more detail, please.
Let’s say you need a home loan for $383,061. One option is a 30-year mortgage with an interest rate of 6.27%. With this option, your monthly payments are $2,363.56. Your total cost for the life of the loan is $850,880.68 (homeownership really seems like a scam, huh?)
Let’s say you borrow the same amount, but for a 40-year mortgage, and this time the interest rate is 6.33%. Your monthly payment would be $2,196—$167 less than the 30-year—but your total cost of the loan is $1,054,285.65. A whopping $203,400 more.
Wow, so 40-year mortgages are a scam?
I’d argue all mortgages are somewhat of a scam if we are being honest, and I don’t consider a 40-year mortgage that much more of a scam than a 30-year. The difference between the two is that one has more legal protections and one does not. With that being the case, 30-year mortgages are definitely preferable.
The truth is, a 40-year mortgage makes sense for someone (or a family) who (that) needs lower monthly payments to afford a home. You have to understand that a home means a lot to someone, and if they want a home they feels comfortable, or just a home at all, opting for a 40-year mortgage term may be necessary step to afford that home. In reality, paying a home in cash would be ideal because you avoid the total cost of ownership, but not that many people have the capital to do that upfront. Therefore, saying a 40-year mortgage is a complete scam versus a 30-year mortgage is a little extreme. The 30-year mortgage is just the lesser of two evils, meaning yes you should avoid the 40-year mortgage but getting a 30-year mortgage doesn’t mean you are getting an amazing deal either.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.