The Arizona Republic - October
For many homeowners, the idea of making payments once a month for 30 years on standard mortgages seems daunting enough.
But 40- and even 50-year residential loans have made their debuts, turning homeownership into a truly lifelong commitment.
The idea behind such ultra long loans is to reduce monthly payments while still allowing buyers to accumulate some principal. The longer the term, the lower the monthly payment, assuming everything else remains the same.
"Some people still feel uncomfortable with the interest-only concept, even if they're only putting in maybe $200 a year in principal," said Chrissa Michelle, a loan officer at Freedom Home Loans in Tempe.
The new 40- and 50-year deals are an alternative to interest-only loans that don't build equity and, in some cases, can lead to a risky negative-amortization situation. Interest-only loans typically carry terms of three, five or 10 years, after which payments adjust upward, requiring the borrower to refinance or start paying down the principal balance.
"With 40-year loans, you don't have that payment-shock danger," said Tim Disbrow, regional manager for Wells Fargo Home Mortgage in Phoenix.
Troy Stang, a vice president of marketing at Arizona Federal, took out an interest-only loan while working for the government and living in the Washington, D.C., area a couple of years ago. Housing in the nation's capital is expensive and Stang knew he would be there a limited time, two factors that made an interest-only loan sensible in his view. Still, he recognizes it as something of a gamble.
"I had a five-year IO with a balloon payment," he said. "I was able to get out, but it was a major risk."
In fact, 40- and 50-year mortgages, like IO loans, are more commonly used in high-priced markets like California and the Northeast compared with the Valley and comparatively less-pricey areas.
Compared with a standard 30-year loan, you'd wind up paying more in interest over time and you'd build up principal more slowly with a 40- or 50-year term. You also would face a slightly higher interest rate since longer terms entail more risk to lenders, who will hike the rate a bit to compensate.
On the other hand, your monthly payment would be lower on a 40-year term compared to even a 30-year deal, much less a 15-year mortgage.
For example, a $200,000, 30-year mortgage in late September would require roughly a $1,231.43 monthly payment, according to Wells Fargo Home Mortgage, quoting a 6.25-percent rate that applied at the time. But the same loan, stretched over 40 years, would put you back just $1,153.15 a month, even at a slightly higher 6.375 percent rate.
"Spreading it out over longer terms allows more people to qualify," Disbrow said, citing the lower monthly payments.
Yet a 40-year mortgage also would require much larger payments over time if a borrower kept it for the full term, notwithstanding the smaller monthly outlays. In the above example, a 30-year borrower would pay the loan off in full after three decades for $443,315, but the 40-year loan would wind up costing about $553,511. That's the damage 10 extra years of monthly payments would inflict.
Though financial disciplinarians cringe at such lengthy time commitments, it's not likely most homeowners would keep paying on such loans for 40 or 50 years.
In an age when people refinance and move frequently, "Relatively few consumers hold their mortgages longer than 10 years," said Erik Lutz, president of Great Southwest Mortgage in Phoenix.
In fact, the U.S. average is to hold residential loans for little more than two years, he said.
