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Florida Today

Mortgage Terms Stretch Into Middle Age

By Anne Straub

If 30 years sounds like a long time to be committed to a loan, try getting your mind around a loan term that lasts 40 years.

That’s four decades. Put another way: If someone were paying off a 40-year mortgage this year, assuming they’d kept it for the entire term, it would have been originated when Lyndon Johnson was president and The Beatles were still touring.

Forty-year mortgages remain a relatively unusual choice for home financing, but they’re becoming a more common option for buyers focused on low monthly payments. The tool can be the key to homeownership for some, but has drawbacks, experts warn.

For Bill and Vickie Scott, the longer term made buying their Melbourne home possible. “If we had gone with a 30-year mortgage, we wouldn’t have been able to afford it,” said Vickie Scott, who operates a secretarial service from her home.

The Scotts signed a lease-purchase agreement with their landlord last year, giving them a year to save a down payment to buy the home at an agreed-upon price. If they hadn’t been able to qualify for a loan by the Aug. 31 deadline, they would have lost the purchase option.

“Every time interest rates went up, I’d call Linda,” Vickie Scott said, referring to mortgage broker Linda Miller, an owner at Beacon Financial in Melbourne. Miller found the couple a mortgage with no down payment or closing costs, and kept monthly payments below $1,000 by stretching the term to 40 years.

That surprised Scott at first. “I didn’t know they even had 40-year mortgages,” she said. The Scotts plan to refinance to a shorter term eventually.

Planning to refinance is a good way to head into a 40-year loan, said Tanya Boggs, vice president of mortgage services at Space Coast Credit Union. “You’ve got to refinance at some point,” Boggs said. “The difference in interest is huge.”

The interest rate is only slightly higher on 40-year loans – about 0.25 to 0.375 percentage points – but over the life of the loan, the additional interest adds up. For example, a $200,000 mortgage at 6 percent for a 30-year term would cost the borrowers $230,000 in interest over the life of the loan. Amortize the same mortgage amount over 40 years, at 6.375 percent interest, and the interest cost soars to $353,000.

“Our loan offices are trained to go over the numbers with members very carefully,” Boggs said. Some people are confident their assets will increase soon, such as through an inheritance, legal settlement or promotion. “They just want their payments to be lower right now,” Boggs said, until their income increases and they can refinance.

Some fixed-rate, 40-year loans are available, but adjustable rates are more common. Rates on those loans stay the same for three, five or seven years, and then adjust every year after that.

Payments under the 40-year term aren’t much lower than the 30-year offers, but for some, it might make the difference. On Boggs’ example of the $200,000 loan, monthly payments on the 40-year loan would come to $1,150. A 30-year loan would come with a lower interest rate and monthly payments of $1,190 – just $40 more.

Beacon has offered 40-year mortgages for at least three years. Then, the office had only one outlet to use that provided the loans. Today, that figure has risen to six or eight, Miller said.

Part of the reason for the increase: A market for the loans on the secondary market, where investors purchase mortgages and provide money for lenders to make more loans. Major investor Fannie Mae announced earlier this year that it will begin buying 40-year mortgages regularly. The company had been purchasing 40-year loans since 2003 in a small pilot program.

“We really don’t expect to see a huge surge in popularity for 40-year loans,” said Sandy Cutts, a spokeswoman for Fannie Mae, noting the disadvantage of the slow buildup of equity. “We just view this as another option for borrowers.”

Miller sees a young professional as the ideal candidate for the loan because that person can expect an increase in income. Then, he or she could refinance, add to the payment to retire their principal faster, or move. The loan isn’t ideal for someone without potential increases in income, or with a risk factor such as no medical coverage. “Those folks could be really stretching themselves,” she said.

Others take a stronger tack. “I don’t think it’s a good option for anyone,” said Holden Lewis, who reports on mortgages for Bankrate.com in West Palm Beach. Any scenario that points to a 40-year loan would probably work better with an interest-only mortgage, he said.

Interest-only loans offer an even lower payment than the 40-year amortization. Borrowers aren’t building equity with their payments, but they’re not building much with a 40-year loan, anyway, he said. “You’re building up the principal so slowly that it doesn’t really make any sense,” Lewis said. “It might be better to get an interest-only and pay a little extra” toward principal.