40-year-fixed mortgage might be worth a look


If you could, would you take out a 40-year fixed rate mortgage?

David and Theresa Wieder of Wheeling, Ill., could and did. They refinanced their home with a mortgage from their credit union at a little more than 6 percent.

Why did they do it?

"How many people today are going to pay off their home loan?" asked David Wieder, 51. "In my dad's era the goal was to pay off a mortgage. I'm not sure that is the case these days."

Wieder's loan is part of a pilot program between Fannie Mae and 21 credit unions across the country. The Wieders got their loan from the Illinois-based Baxter Credit Union.

"When the pilot was introduced ... we jumped on it right away," said Gil Chavez, manager of mortgage operations for Baxter. "We feel that it's an outreach to more folks as far as affordability, and it gives alternatives to adjustable rate mortgages."

Although 40-year mortgage loans aren't new, the possibility that such a financial product would be offered to many consumers is. Fannie Mae, which launched the pilot program in the fourth quarter of 2003, is testing to see whether stretching people's loan payments out by 10 years could help make owning a home more affordable for low- and moderate-income borrowers.

"Folks who live in high-cost areas, such as the West Coast, and first-time home buyers concerned about keeping their monthly payments manageable may find the 40-year fixed rate attractive," said Sandy Cutts, a spokesperson for Fannie Mae.

It's possible this loan product would especially benefit black and Hispanic consumers, who lag significantly behind whites in homeownership.

Fannie Mae, the nation's largest source of financing for home mortgages, has pledged through its "American Dream Commitment" to expand access to homeownership for 6 million first-time home buyers. Among those 6 million buyers would be 1.8 million minority families. Fannie Mae, which has been criticized for not doing more to help low-income families become homeowners, said it wants to raise the minority homeownership rate to 55 percent with the ultimate goal of closing the homeownership gap entirely.

In the third quarter of 2004, 49 percent of black people owned a home, compared with 76 percent of all white people, according to the U.S. Census Bureau. The homeownership rate for Hispanic households was also close to 49 percent.

Forty-year fixed mortgages are essentially the same as 30-year loans, but because the loan period is longer borrowers could potentially qualify for larger mortgages. However, the extra 10 years means you pay more interest over the life of the loan.

For example, let's say you have a $300,000 mortgage and the interest rate is 6 percent fixed for 30 years. Your monthly mortgage payment would be about $1,800, not including taxes and private mortgage insurance. Over the life of the 30-year loan you would pay about $348,000 in interest.

A $300,000 home loan for 40 years at a 6.25 percent interest rate would drop your monthly mortgage payment to about $1,700. However, your total interest payments would be more than $517,000.

As you can see, the difference in interest is enormous, but the monthly payment savings isn't.

Although not a critic of the 40-year mortgage, Allen Fishbein, director of housing and credit policy at Consumer Federation of America, says the decision to get a 40-year mortgage should be made with prudence.

"Consumers should be aware of the tradeoffs involved with this type of loan and they should seek advice on 40-year loans versus other loan types before attempting to obtain one," Fishbein said.

One tradeoff -- the longer the loan, the more time it could take to build up equity, Fishbein points out.

Cutts said Fannie Mae could decide by the first quarter of next year whether to roll out the 40-year mortgage program nationwide.

Right now, the loan product is available only as part of the pilot with certain credit unions and their members. Only one-unit, owner-occupied properties are eligible. The loan is not available for vacation homes, investment properties, co-ops or manufactured homes.

For more information on a 40-year loan and a list of credit unions participating in the pilot program, contact Fannie Mae at 1-800-732-6643.

Frankly, I'm not sure whether a 40-year mortgage can close any housing gaps. If it can, great.

But I do agree with David Wieder, the Illinois homeowner. A growing number of people are becoming comfortable or resigned to the fact that they'll spend more than half their lifetimes making mortgage payments, partly because they move before the loans mature.

"A lot of people asked me why borrow for 40 years," Wieder said. "But I told them either way whether we had a 30-year loan or 40-year loan, we weren't going to pay it off. The way we looked at it, we are surely not going to be in our house 40 more years."




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