40 Year Loans

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So the Mrs and I are moving soon and looking to find ways to keep down costs as I will be going back to school to work on another degree. I have heard lately about 40 year mortgages being offered. We have stumbled upon a unique investment opportunity that would work perfect for us while I am in school.

My thoughts are:
1.) a 40 year loan would help reduce monthly costs
2.) We don't plan on being there for more than 5 years (so we wouldn't actually be paying a nortgage for 40 years but would help lower costs for the 4 or 5 years that we are there)
3.) This investment is bound to appreciate over the next 4-5 years which will afford us the opportunity to build a little equity even if we are barely paying down the mortgage.

So I was just wondering if anyone has dealt with a 40 year loan and had any insights as to pros and cons of them.

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40 years??? If you take out a mortgage at 25 you'll be retired and old by the time you finally own the place!!!

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That's the thing... I don't plan on retiring with this place.

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I'd say go for it, jp. The first few years of any mortgage you're paying mostly interest. If you're only planning to stay five years, I doubt there'd be much difference in the amount of equity difference between the 30 and the 40 year mortgage. It probably makes a big difference in your monthly payments, though!

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That's what I am thinking, swimpy.

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I'm not familiar with them, either, but even though you would basically be paying interest only during the next 5 years, the value of land won't go down. (has it ever??) The worst you could do is end up living "free" when it all washes out.

Expanding on a current degree or are you going into a whole new field?

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I'd say it's a good deal if (1) what you're going to pay on your mortgage, including interest and taxes is the same or less than you'd be paying in rent and/or (2) you can take the tax break.

If you live in the house as your principle residence for at least 2 years out of the 5 you own it, you will not have any capital gains tax for anything you make when you sell it ($250,000 for a single person as far as a capital gain limit $500,000 for a married couple).

Figure out how much interest and taxes you'd pay over the next five years, subtract your tax savings, and compare to what you'll profit when you sell it. It might be that you've been able to live there at a very low cost for those 5 years.

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Yes, the value of land has gone down. At least in California, it has tended to go back up again, and how, but one needs to be able to wait it out if that happens.

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Yeah. And now --> 5 years from now seems like one of the more likely periods for the value to go down. The housing market is already having problems and many more are forecast -- impossible to KNOW, for sure, but seems reasonable.

That's an issue no matter what, though, and I don't know anything in particular about 40-year mortgages. I remember being advised not to when we bought our house 2 years ago, but I just can't remember the reason. We do plan to stay here indefinitely so that might've been all, and not applicable to you. I'll see if I can find anything in my "buying a house" file.

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You aren't coming over to Madtown, are you?

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Researched a bit... seems that the problem is that there isn't much actual savings per month (less than you'd think), but you pay WAY more interest over the life of the loan. If you don't plan to have the loan for that long that's less of a minus, but still sounds like it's a little snake-oily.

Quote:

I thought the 40-year mortgage was pushing the limits. Now I see that some lenders are offering 50-year mortgages! From all the math I performed, I can't see that a 50-year mortgage would cut monthly payments enough to justify the longer term of the mortgage. For instance:

A $200,000 mortgage with a 30-year fixed rate at 6.63% would cost you $1,281.28 per month.
Total interest paid: $261,262

A $200,000 mortgage with a 50-year fixed rate at 6.63% would cost you $1,147.06 per month.
Total interest paid: $488,236

So, to lower your payments $134.22 per month, you would pay an additional $226,974 in interest. However, keep in mind that no bank is going to offer you a 50-year mortgage for the same rate as a 30-year mortgage. Therefore, your "savings" wouldn't be anywhere near $134. I just don't see this as being a good deal. Stick with the 30-year mortgage!

http://allthingsfinancialblog.com/2006/05/10/and-i-thought-a-40-year-mortgage-was-bad/

Quote:

40 Year Mortgages....Coming to a Lender near you!

I just returned from the Annual Convention for the National Association of Mortgage Brokers. This annual gathering is the showcase for lenders to bring out their new and exciting products. The new 40 year mortgage was one such product creating some buzz. But is it all its cracked up to be? Read on....

I suppose you might be wondering why on earth we need a 40 year mortgage. The answer is California. According to the California Association of Realtors, only 17 % of the people that live in that state can afford the median priced home of $509,230. This is because you need a minimum income of $120,000 to even qualify!

According to the National Association of Realtors, affordability on a national level is near record levels at 76%.

For those of us in Michigan, in my opinion, this isn't a very exciting product. According to the Fannie Mae Consumer Fact Sheet, this loan will likely have an interest rate 1\4% higher than the 30 year loan. The typical monthly savings will only be around $43 each month. But that $43 will cost you 10 years more payments adding a whopping $108,000 to the cost of your home.

Mark my words; "Michigan Lenders will promote the heck out of this Loan". For those of us in Michigan....I give it a big yawn.

As always, my advice is to have a lender that will listen to your needs and then prescribe the best product for you . Far too many people are going to be sold a 40 year mortgage in Michigan.

(Emphasis in original.)

http://pacesettermortgage.typepad.com/pacesetter_mortgage_weblo/2005/06/40_year_mortgag.html

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Thanks for the info guys... now lets see if I can respond to all in one post.

Chai,
1.) Mortgage on a 30 year fixed would be around 100-200 more than a comparable apartment. I'd assume that a 40 year would close that gap at least a little.

2.) Yes we can take the tax break.

3.0 Profit from when we sell is a little more tricky. The town in which we are looking is a very nice suburb that has basically run out of land to build on. So, they converted old apartment buildings into condos. Comparable condo layouts that are 30+ years old are seling at around the same price... except everything here is new. I would be willing to pay more for the space now... let alone 4 years from now. I'm thinking that once they reach capacity (they are at about 50% right now) they are bound to go up in price.

Patiodog,

No MadTown... we'll be headed a bit south of where we are at now.

Soz,

Thanks for the info. The increase in interest payments wouldn't matter that much to us as we don't plan on paying on it for that long... but the monthly savings quoted there, while not a huge difference could be enough to make a difference.... sounds like I have some homework ahead of me.

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Also, if you're truly only going to be there for five years, compare the rates of a 5/1 ARM. They are usually discounted 1/4 -1/2% from a 30 year mortgage.

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Some numbers from my current mortgage holder on a mortgage of $188,000:

30-year 6.125% P&I = $1142.31
5/1 ARM 5.875% P&I = $920.42

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Ohhh... now that is a considerable difference.

A 5/1 is fixed for 5 years and then goes into an adjustable rate, right?

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yes, the first 5 years are discounted and then it goes into a regular adjustable mortgage. We had a 5/1 ARM then at the end of 5 years refinanced to a 3/1 and caught a 4% rate for the first three years (three years ago).

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I look at the Real Estate ads every Sunday, and while most houses seem to move, there's always those you see for a few weeks, then the ads stop, then they put them back in the paper again....in the worst case, they'll disappear from the ads a second time, then come back being advertised with a 10K or more reduction in price.

These are the houses that the owners are just being greedy IMO.

When you read the Real Estate advice columns, they'll make some brilliant statement like "If you house isn't selling, you should reconsider the asking price and lower it"

DUH.... Rolling Eyes

If I wanted my house to move 5 years from now, I would have resonable expectations what the market will pay. Otherwise, as in the case of the ARM, you'd be paying more, and refinancing isn't free.

If the house wasn't moving, would you be willing to rent it out while it's on the market?

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Nice move. Do you have to refi again, now?

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This looks like it has a lot of good info:

http://www.nytimes.com/2005/07/17/realestate/17cov.html?ex=1159675200&en=b5479777f43a25ec&ei=5070

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Chai Tea wrote:

I look at the Real Estate ads every Sunday, and while most houses seem to move, there's always those you see for a few weeks, then the ads stop, then they put them back in the paper again....in the worst case, they'll disappear from the ads a second time, then come back being advertised with a 10K or more reduction in price.

These are the houses that the owners are just being greedy IMO.

When you read the Real Estate advice columns, they'll make some brilliant statement like "If you house isn't selling, you should reconsider the asking price and lower it"

DUH....

If I wanted my house to move 5 years from now, I would have resonable expectations what the market will pay. Otherwise, as in the case of the ARM, you'd be paying more, and refinancing isn't free.

If the house wasn't moving, would you be willing to rent it out while it's on the market?

I'm not looking to make a million dollars off of it, but it should certainly go up after 5 years considering the circumstances... even in the slowed down market that we are in now.

In 5 years if it doesn't move... it really depends on our situation at the time. Either we stay there until we can sell, find a renter, or reduce in order to unload it. I'm really not that worried about 5 years from now as much as I am looking to reduce our monthly expenses up untill that time.

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