40-year real estate loan stirs controversy

Tweaking 30-year loan may reap more benefits

"I see where Fannie Mae is test-marketing 40-year mortgages through a group of credit unions. Do you see the 40-year mortgage as a useful option for borrowers?" No. While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest. Furthermore, a small tweaking in the 30-year mortgage would accomplish the same thing, maybe better. Arithmetic of Term Reduction: The impact of an extension in term on the mortgage payment is smaller the longer the initial term. At 6 percent interest, extending the term from 10 years to 20 reduces the monthly payment by 35.5 percent. Extending it further to 30 years reduces the payment by 16.3 percent. And going to 40 years reduces it by only 8.2 percent. Even 8.2 percent is an exaggeration because lenders will set a rate at least 1/4 percent higher on 40-year than on 30-year mortgages. With a 1/4 percent increment, the payment reduction falls to 5.3 percent. If market interest rates escalate, the bang from ...