The 40-year mortgage

The 40-year mortgage is growing more popular, but is it a true answer to debt relief? Many loan officers are promoting lower mortgage payments, citing the 40-year long term as a huge benefit to cash-strapped homeowners. But how exactly are they beneficial?

President of the website MortgageGrader.com, Jeff Lazerson, stated that the 40-year mortgage “is a joke.” He continued, “Amortizing a loan over 10 more years does very little to decrease the payment, and the industry has historically priced 40-year loans more expensively than 30-year loans, so the benefit that the consumer perceives they should get, [in reality] they don’t get.” It’s typical for these loans to have a higher interest rate, and over four decades the consumer will pay far more in interest than someone with a 30 year mortgage.

An example

To see how a 40-year mortgage weighs against a 30-year mortgage, here is an example. If a consumer borrowed $ 100,000.00 with 5% interest for 30 years, the monthly payment works out to about $ 540. At the same rate, a 40 year mortgage would reduce monthly payments by $ 54, to $ 482.

Typically finding a 40 year and 30 year mortgage with the same interest rates is impossible. Normally 40-year mortgages come with a higher interest rate automatically. Looking at this example with a 5.25% interest on a 40 year mortgage, lowers the payment to $ 499 a month. That would save about $ 37 a month, compared with the 30 year mortgage.

The real savings come into play when you look at the overall interest payments on the lifetime of the loan. See the chart below for the final numbers.

In the end, the 40 year mortgage at 5.25% adds up to $ 46,560 in payments. That is A LOT, especially since you only save $ 37 a month – which amounts to little more than beer money. Is an extra $ 37 a month going to actually provide any debt relief if you lose $ 50,000 over the long run?

The Upside

There is a small percentage of people who would opt for the 40-year mortgage. These are people who aren’t concerned, at least too much, with the ultimate length of the loan, but want the lowest possible payment. Robert Satnick, president of Prime Financial Services, stated, “What’s nice about a 40-year loan—if it’s not an interest-only loan—is that they are contributing something, even though it’s a small amount, to pay down their principle. It increases the pride of ownership, rather than, at the end of the five years, [consumers end up] owing as much as they borrowed.”

A Way to Maneuver

The 40-year mortgage can also be managed by making larger payments. Bob Walters, Chief Economist at Quicken, stated, “The term of the loan doesn’t have to be locked into 40 years. You can’t make it longer, but you can certainly make it shorter.” Extra payments, and paying the loan off quickly, will benefit borrowers greatly in the long run. Walters added, “People can still benefit from a 40-year loan by paying it off quicker, taking advantage of the lower payment, but adding money to it as they move along.”

Consumers Decide

For consumers looking for monthly debt relief, the 40-year loan may be a viable answer. As long as they know that the money they pay for interest will be greater on a 40 year rather than a 30 year, if they follow the loan structure. If a consumer is looking to sign up for a 40-year mortgage, they should understand the terms and conditions, and then choose wisely.

Since there are many people unemployed nowadays, many homeowners find that they are unable to keep up with their house payments. Some of them have good rates but, without employment, they still cannot keep paying. Some homeowners are worse off and have adjustable rate mortgages and find their home payments adjust to something they cannot afford. Many homeowners cannot afford to stay in their homes so they must sell and move on. The problem is that, with falling real estate prices, they also find themselves having upside down mortgages. That means, they owe the banks more than their homes are worth. So, what can they do?

Should The Sell Their Homes?

The first option that comes to mind for lots of homeowners is to sell and move on. The problem is that, if they were to sell their homes, they will get less for them than what they owe the banks. So, selling may not be the most logical choice. However, it is often a good idea to talk to a Realtor to make absolutely sure that there is no way to sell and walk away free and clear without having to come up with the rest of the money for the mortgage balance later on.

Is Refinancing an Option?

Often when you owe more than your home is worth, mortgage companies are not likely to lend. However, there may be options that allow you to refinance your home or modify your loan especially when the rates are historically low right now. If your credit is good and you wonder if refinancing is good for you or have any home loan questions, call your lender as well as other lenders for comparison. Sometimes, your own bank might not have the resources to help you but other banks may be able to.

Debt Relief Act After Foreclosure

Lots of homeowners cannot sell their homes, cannot refinance and cannot modify their loans. Then their mortgage companies try to foreclose on them. Foreclosure severely hurt your credit so it is advisable to call your bank and try to negotiate with them before they foreclose. If they do go ahead with foreclosure, however, there is the new Mortgage Forgiveness Debt Relief Act of 2007 that will work on your side. This Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

With many people unemployed in this bad economic time, many homeowners find themselves unable to keep up with their regular mortgage payments. Some people have low rates but, without employment, they still cannot keep up. Some homeowners have adjustable rate mortgages and find their home payments adjust to outrageously high amounts. Many homeowners cannot afford to stay in their current homes so they should sell and move on. The problem is that, with falling real estate prices, they also find themselves having upside down mortgages. That means, they owe the banks more than their homes are worth. So, what are their options?

Should Homeowners Sell Their Homes?

The first thing to do that comes to mind for lots of homeowners is to sell and move on. The problem is that, if they were to sell their homes, they are going to get less for them than what they owe the mortgage companies. So, selling may not be the best option. However, it is a good idea to consult a Realtor to make sure that there is not a way to sell and walk away free and clear without having to come up with the rest of the money for the mortgage balance later on.

Choosing to Refinance

Often when you owe more than your home is worth, banks will not lend. However, there may be options that allow you to refinance your home or modify your loan since the rates are very low right now. If your credit is good and want to explore the option of refinancing or have any home loan questions, call your bank as well as other mortgage companies for comparison. Sometimes, your own lender may not be able to help you but other banks may be able to.

Debt Relief After Foreclosure

Lots of homeowners cannot sell their homes, cannot refinance and cannot modify their loans. Then their mortgage companies try to foreclose on them. Foreclosure severely hurt your credit so it is wise to call your bank and try to negotiate with them before they foreclose. If they do go ahead with foreclosure, however, there is the Mortgage Forgiveness Debt Relief Act of 2007 that will work on your side. This Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.