40-year fixed-rate mortgages appear

A young woman in Minnesota was looking for the lowest possible monthly payment she could get with a fixed-rate mortgage. Instead of opting for the standard 30-year fixed-rate mortgage, she chose to stretch the loan an additional 10 years.

Now thanks to a 40-year fixed-rate mortgage, the woman can afford slightly more house than the first-time home buyer would’ve been able to purchase without it, said Brad Crandall, president of CU Mortgage Services. Owned by 54 Minnesota credit union organizations, CU Mortgage Services is one of about a dozen credit unions across the country to begin offering 40-year fixed-rate mortgages as part of a pilot program through Fannie Mae.

Interest in the loan has been slow so far, Crandall and others have said, but they expect it to pick up as interest rates increase and price out some first-time home buyers from the ever-appreciating housing market. Fannie Mae rolled out the pilot earlier this year to gauge how popular such a loan would be. The idea behind the extra 10 years is simple: Make houses more affordable to more consumers by extending the loan terms.

Still, the concept has been slow to catch on. Fannie Mae spokeswoman Sandy Cutts believes that’s because interest rates are still so low.

“It’s not quite the right time, ideal time, for it yet,” Cutts said. “It’s still building some momentum.”

By the end of the year, Fannie Mae hopes to know how popular the 40-year mortgage is within the pilot programs, Cutts said. There is no timeline yet on whether Fannie will expand the pilot program to other lenders or make it a permanent offering.

The young borrower Crandall mentioned is only one of two borrowers he knows of who have opted for the loan. The other borrower used it for a refinance, he said.

At Hiway Federal Credit Union, another Minnesota credit union offering the pilot program, only a handful of borrowers have gone for the 40-year mortgage, said Chris Olsen, VP of real estate and business lending.

Surprisingly, Olsen said, those mortgages have been for balances on the lower end of the scale, mostly in the $110,000 to $115,000 range. Still, the extra 10 years helped make those loans more affordable to those borrowers.

The interest rate on the 40-year fixed-rate mortgage is about a quarter to 3/8 percentage point higher than on the standard 30-year mortgage. But the longer amortization period helps lower the monthly payments. On a $200,000 mortgage, monthly payments are about $67 lower than they would be with a 30-year mortgage, Crandall said.

That’s not a lot of money, and is less than what some people expect to have with an extra 10 years tacked on, but it’s still a savings, Crandall said. If people could save that much money on a car loan, for example, they’d jump at the chance, he said.

“It’s becoming harder and harder for average working class folks to make ends meet and so obviously this might be something that’s attractive to them because it would stretch their dollars further,” Cutts said.

The loan’s popularity may depend on where the borrower lives, Olson said. The Midwest tends to be fairly conservative and the thought of paying for something over 40 years may not sit well with some borrowers. The 40-year mortgage may become more popular in areas with rapid appreciation rates, or in various locations if interest rates start rising substantially.

The potential interest-rate volatility is one reason Crandall believes 40-year mortgages could make an attractive alternative to interest-only loans. Interest-only mortgages can lower borrowers’ monthly payments initially, but many have payment shock down the road, he said. That’s because they end up staying in the house longer than they’d originally planned – long enough to reach the point when payments increase.