Is it Wise to Take Out a 40 Year Mortgage in Today's Real Estate Market?
Posted: Dec 11, 2013
40 year mortgages sprung up in the late 90s from what seemed to be a necessity. As you may remember, back in these beautiful days, as far as real estate investors were concerned, housing prices were soaring! The bad part of this is more and more people were becoming unable to afford a modest home. However, spreading payments over 40 years as opposed to 30, 20 or 15 years, in many cases, made these unaffordable homes, affordable.
There were a lot of things that happened in the late 90s that helped people get into homes they really couldn't afford. 40 year mortgages were probably the least damaging of all these things. Legislatures bending regulations was probably the worst thing that happened. Then, there was the out and out evil "reverse amortization mortgage."
The Reverse Am Mortgage
The reverse amortization mortgage, or reverse am, as it was sometimes referred to, was a deal lenders made with people which made their monthly mortgage payments too low to cover the cost of the interest on each payment. Therefore, as time went on, instead of paying down the price of their mortgage, it was actually increasing. This would've been by all right if housing prices continued to soar. However, the rising housing price phenomenon did not last forever. This left many people bankrupt and foreclosed.
An Honest Option
The 40 year mortgage was really not a bad thing. It did not involve trickery in the least. In fact, those who secured a fixed rate for 40 years probably did all right. It is somewhat troubling that many people who took out these long-term contracts are now 14 or 15 years into them and still owe more than 25 years on them, but it is still not factual that they were ripped off. It may not have been the best deal ever but it certainly doesn't fit into the category of a crime. Conversely, I believe reverse amortization mortgages were and are a crime!
Things Are Different Now
Nowadays, housing prices are not soaring and interest rates are practically zero. In this economic environment, 40 year mortgages are just not around for normal housing transactions. In fact, many people are opting for 15 year mortgages instead of signing up for the old standard of 30 years. For anyone qualified, 15 year mortgage can be a great deal just because of the mere fact many lending institutions offer them at prices discounted from their 30 year mortgages.
Still, though you may want to consider taking out a 15 year mortgage if you have the opportunity, you should also consider the fact that if you take out a 30 year and it has no prepayment penalty, you can always pay ahead. This way, paying extra money monthly would be your option and not your obligation. So, using this method could possibly save you from getting into a future bind. However, as far as the 40 year mortgage option, it is just not a viable one anymore.
The author, Ed Lathrop, is a successful real estate investor and a series 3 certified commodities broker. His Website, Amortization Schedule allows you to look at and/or print out amortization schedules for any loan or mortgage.