40 Year Fixed Mortgage Rate

Fannie Mae announced that they will now begin purchasing 40 year mortgages. This will now open the market up to many lenders to offer this product that allows a consumer to reduce their monthly payments. Fannie Mae tested the 40 year mortgage for many months before announcing that they will now purchase them. Fannie Mae said they decided to allow the longer term mortgages to help the afforability of the housing market.

Not all products will be available for the longer term mortgage. The products that will intially be rolled out are the fixed rate mortgages and the longer term adjustable rate mortgages such as the three, five, seven and ten year adjustable rate mortgages. There will also be a limit as to the maximum loan to value (LTV) capped at 95%. Fannie Mae will also not allow the 40 year amortization with the popular 1 year adjustable rate mortgages and the Option ARM mortgages which allow for negative amortization by offering a fixed minimum payment at 1%.

The benefits of the Forty Year Mortgage:

The longer payment term stretches the loan for another 10 years and reduces the monthly payment considerably. If you are a borrower who is not qualifying for a loan becuase your "debt to income ratio" is to high, the 40 year mortgage will help you bring the "debt to income ratio" down and you may then qualify. The longer term is also another opton to use if you need lower monthly payments. The following table is an example of how the monthly principal and interest payment would be reduced:

Loan Amount Interest Rate Loan Term Monthly Payment of Principal & Interest
$100,000 6% 30 years $599.55
$100,000 6% 40 years $550.21 monthly difference $49.34 or $5,920.08 over 10 years.
$200,000 6% 30 years $1,198.10
$200,000 6% 40 years $1,100.43 monthly difference $97.67 or $11,720.40 over 10 years.
$300,000 6% 30 years $1,798.65
$300,000 6% 40 years $1,650.64 monthly difference $148.01 or $17,761.20 over 10 years.

For the borrower that is borrowing $200,000, the extra monthly savings could be used to purchase a larger home. For instance, the monthly savings on the $200,000 loan is $97.67. If this were applied to the mortgage this borrower could have a mortgage of $217,500 for the same monthly payment of the 30 year mortgage, if they chose the 40 year mortgage term. Another benefit of the 40 year mortgage is to allow the consumer to purchase homes in an enviroment where home values are apreciating faster then consumers incomes are going up. If your yearly raise is 3% per year but the housing market around you is increasing by 20 to 30 percent, then this is another option that will allow a consumer to purchase a larger more expensive home than they could if they only had the 30 year fixed rate. If you are considering an Adjustable Rate Mortgage the 40 year mortgage may be the better option. The downside to the adjustable rate mortgage is that the interest rate is only fixed for a short period of time, usually between 1 to 10 years, then the rate changes and can increase up to 6% over the next 3 to 5 years. This could increase the payment to a point that is not affordable. The 40 Year fixed rate mortgage allows the borrower to maintain a fixed payment.

The 40 year mortgage is not always the best product for everyone:

With every benefit there is always something to consider. The longer term also means that you will be paying more interest over the life of the loan. If you are the borrower that will live in your home for a considerable period of time then the 40 year mortgage may not be the best choice. As a result of the longer term you build equity in the property at a slower pace than the 30 year term mortgage.

What you should consider when contemplating a Forty year mortgage:
  • How long will you be in the home?
  • Should you consider an Adjustable Rate Mortgage or the longer term that the 40 year mortgage offers?
  • Would you be better off with the 30 year mortgage and higher payments that will force you to build equity faster in your home?
  • Are you using the 40 year mortgage just to qualify which may be pushing your housing affordabilty?
  • Would you be better off with an interest only loan?
  • Adjustable rates have lower interest rates at the start which may be better for you but what if I stay longer?
Alternate options for the 40 year mortgage:

Interest Only Loan. There are many options available today for interest only loans. The loans range from 1 month adjustable to 30 year fixed interest only loans. Your payments are typically lower than a 40 year mortgage but you are not paying anything towards the principal in your home. This option may work for you in a escalating real estate enviroment.

Adjustable rate mortgage. Adjustable rates can come in many forms. The periods of an adjustable rate can be from 1 month to 10 years. Typically the interest rate is lower on a adjustable rate mortgage than a fixed rate mortgage which allows for a lower monthly payment. With the launch of the 40 year mortgage term and the combination of the adjustable rate mortgage consumers can see a signifigant reduction in their monthly payments.

Pay Option mortgage. You will have 4 options each month for making your mortgage payment: a fixed minimum monthly payment, an interest only payment, a 15 year fully amortized payment, and a 30 year fully amortized payment. You choose the payment option that best fits with your mortgage refinancing monthly budget. Typically the fixed minimim payment is based on 1%. This type of loan can allow for negative amortization.