The 40 Year Mortgage

The 40-year mortgage, for years a niche product, is finally set to have a strong presence in the mainstream mortgage market. Forty-year mortgages have lower monthly payments than the well-known 30-year version, although they cost more over the life of the loan because the borrower pays interest for 10 years longer. With the lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year mortgages. Fannie Mae stuck its toe in the 40-year mortgage pool about two years ago when it started a pilot program to buy the long loans from 22 credit unions. Fannie Mae now buys conforming 40-year mortgages from any qualified lender.

It's not a sure bet that 40-year loans will catch on. First, the interest rates are slightly higher--usually an eighth to a quarter of a percentage point. Second, tacking 10 years onto the payment schedule doesn't save all that much money every month.

In recent years, its chief competition was interest-only loans which occupied a big chunk of the mortgage market in high-price cities as buyers hunted desperately for ways to afford more expensive houses. But with rising interest rate of ARMs, the advantages of having an interest-only loan are also vaporing away.

Still, there are a plenty of home buyers who might barely stray outside of those guidelines when applying for a 30-year mortgage--for example, if the house payment would be 29% of monthly income, a 40-year loan might allow a borrower to qualify by sliding under the 28% threshold. The real difference is quite small, though: On a $200,000 loan, the reduction in monthly mortgage would amount to less than 64$ a month on a 40-year, fixed-rate mortgage at 5.25% compared to a 30-year fixed at 5%. Over the lifetime of the loan you'll end up paying much more in total interest, though.