Sunday, August 30, 2009

The 40 Year Mortgage. Why Not?

I don't understand why lenders don't offer 40 year mortgages more often. Anyone?


I also don't understand why lenders won’t talk about extending homeowners’ 30-year mortgages for 40-year mortgages, when the homeowners get behind and face foreclosure.


So many metro Phoenix-area homeowners are underwater but aren't eligible for federal Making Home Affordable money because those refi limits cut off at 105% of current market value.  Home values in the metro Phoenix region are down way more than 5%. More like 30% to 60%.


Let's do the math. All calculations below were obtained using Mortgage-Info.com’s amortization wizard. You can click over to BankRate.com to get today’s Prime Rate.


Example -- $250,000 borrowed, 30-Year Mortgage













































AmountTermRatePymtLifetime Interest Earned by LenderHomeowner Savings per Month
$250,00030-yr6.50%$1,580$318,861-
$250,00040-yr6.50%$1,464$452,548$116
$250,00040-yr5.125%$1,226$338,606$354
$250,00040-yr4.25%$1,084$270,344$496


Where’d the Numbers Come From?


If the lender in this example would do nothing but extend the term of the mortgage from 30 years to 40, the homeowner’s payment drops by $116 each month.


If the lender would drop the interest rate and extend the term, bingo, homeowner savings of $354 per month. All of a sudden, we’re talking about real numbers here. Probably enough to keep most folks in their home, happily & safely making their payment on time, every month (at least as long as those folks haven't already joined the lines at the unemployment office).


Not only is this a win for the homeowner, the lender wins too, by collecting a lot more interest over the life of the modified loan. The only way the lenders lose is if they drop the interest rate below current market rates and extend the term (see the last line of the chart above, 4.25% at 40 years).


Win-win. Sounds like a no-brainer to me. Lenders?