In this post you will most of the information regarding the pros and cons of reverse mortgages for retirement. Why, in today’s higher-interest-rate market, a longer-term loan may help with affordability difficulties.
With inflation reaching a 40-year high in June, is it time to make the 40-year mortgage more common? It might be a good moment for traditional lenders to provide loans that will benefit both homebuyers and mortgage originators.
Mortgage applications were down for four of those six weeks, according to the Mortgage Bankers Association. Given statements by Federal Reserve Chairman Jerome Powell that the Federal Open Market Committee, which sets interest rates, is determined to reduce inflation to 2% from its current 8.6 percent level — which means raising interest rates — the downward trend in mortgage applications is likely to continue.
Two major lenders and three private lenders in Massachusetts may have a solution to getting people into homes: the 40-year mortgage.
The Federal Housing Administration allows 40-year mortgages as a modification to current mortgages if it will keep people in their houses during these COVID-19-induced periods, however 40-year mortgages are not yet acquired by the GSEs. The FHA solicited feedback on the prospect of making this change permanent. The American Bankers Association, a trade group representing the country’s banks, and the MBA both filed comments to the FHA in support of the change.
The First Decade Was Interest-Only
Needham Bank, based in the Massachusetts town of the same name, began issuing a 40-year mortgage four years ago, while Metro Credit Union, based in Chelsea, Massachusetts, began offering this unique loan three months ago. Needham’s is a 5/5 ARM with an interest rate starting at 4.25 percent, while Metro’s is fixed at 4.5 percent. Sprout Mortgage, situated in East Meadow, New York, will begin issuing a 40-year mortgage in July 2021.
Loans have strong numbers
Another Non-QM business, Rockville, Maryland-based ACC Mortgage, offers a 40-year mortgage comparable to those offered by Angel Oak and Sprout. It’s an interest-only payment for the first ten years, then a 30-year fixed mortgage.
With interest rates rising, a 30-year mortgage may become more difficult for some, making a 40-year mortgage a plausible choice.
“It appeals to folks at all ends of the spectrum,” Needham Bank’s Sinclair said. “Obviously, it appeals to first-time home buyers who want to keep their payments low.” It also appeals to a second-home buyer who wants to keep their payments low, as well as a step-up buyer searching for a larger property who wants to keep their payments low.”
According to Cashman of Metro Credit Union, pensioners are another category of people who may benefit from a 40-year mortgage.
“When people retire, their income is reduced,” Cashman explained. “Their previous mortgage payment was more burdensome, and this (the 40-year mortgage) allows them to stay in their house longer.”
While she does not issue 40-year mortgages, Dawn Ryan, Senior Loan Officer at Embrace Home Loans in Middletown, Rhode Island, believes they have advantages.
“It might mean the difference between qualifying for a mortgage and not qualifying,” she added. “It might also bring piece of mind in managing a monthly payment because it’s cheaper, and, especially, with property values not falling.”
“The 40-year mortgage is one of the methods to help with affordability concerns,” said Angel Oak’s Winokur. We’ve been providing them for at least a few years. People are paying more attention to them and asking more questions about them than ever before.”
“It makes the payments more reasonable,” ACC’s Senko explained. “The slogan I’ve always used is that you can’t pay less every month, but you can pay more.” If someone pays more, the equity position and principal reduction will be accelerated.”
The 40-year mortgage is enticing in these volatile times
“In the current situation, with housing supply scarce and home prices skyrocketing, the more difficult it is for the person to come up with a down payment,” Cashman explained. “We don’t control property prices; we don’t control mortgage rates, which might make it difficult for people to get into or stay in a home.” Time is the only thing we have to battle this lack of affordability. That is why I have a 40-year mortgage.”
A $600,000, 40-year fixed mortgage with a 4.5 percent interest rate, for example, has a monthly payment of $2,697.38 without taxes. In instance, the monthly payment for the same amount on a 30-year fixed mortgage with a 5.25 percent interest rate, likewise before taxes, is $3,313.22: a difference of approximately $616.
“Anytime you can reduce a borrower’s payment, that really helps,” Sinclair said. “A first-time home buyer would require mortgage insurance on the loan if they make a minimal down payment.” The difference between a 30-year and a 40-year mortgage can sometimes cover the expense of mortgage insurance for the borrower.”
The 40-year mortgage benefits both individuals and communities
“We’re really focused on our neighbourhood and affordable housing, as well as helping individuals better their financial well-being,” Cashman explained. “Because prices are rising, the following generation is having difficulty purchasing their first house.” This helps folks get started and remain on track.”
Ryan views the advantages of the 40-year mortgage in a different light.
“Unlike our ancestors, mortgages are not one-time events,” she explained. “Because people refinance, a 40-year mortgage may be the best way to get into a property.”
Mortgage brokers require new loan products
“With the increase in rates, especially in the last six months,” said Bjelac, “they (mortgage originators) are searching for additional methods to originate loans.” “This would not have been as popular if it had been released earlier, perhaps a couple of years ago.” I believe that now that interest rates have increased and their pipelines have shrunk, banks are seeking for new methods to qualify borrowers.”
When asked if she would be interested in offering 40-year mortgages to her clients, Ryan of Embrace Home Loan said, “If it benefitted the consumer, sure.”
According to Thorne of Sprout Mortgage, 40-year mortgages provide “huge flexibility for many (mortgage) originators, and thereby benefits them like no other solution does.”
More interest income
While 40-year mortgages take longer to repay and so demand more interest payments than standard 30-year mortgages, there may be an advantage because it provides more money for the lender. Thorne of Sprout Mortgage explained, “It depends on the period and term of the mortgage.” Unless the loan is really short or extremely lengthy, it truly is a win-win situation for originators and lenders.”
The disadvantage is that you will have to pay extra interest.
Ryan and Sinclair both described the disadvantage in the same way.
“You’ll end up paying more in interest.” What if a client makes one more principle payment each year? They’ll shorten the debt by five and a half years, so the 40-year mortgage won’t hurt them as much,” Ryan explained.
“You’re not creating equity as quickly as you would with a 30-year, 20-year, or 15-year mortgage,” Sinclair added. With a 40-year mortgage, you’re simply manipulating your monthly cash flow to achieve the lowest payment feasible. So, if you don’t have the discipline to make extra principle payments, you won’t be able to accumulate equity as quickly.”
The loan’s repayment period
While the longer the loan, the higher the interest payments, Sinclair and Cashman looked at it this way:
“I don’t think today’s borrowers ever assume they’re going to see it through to pay off,” Sinclair said of mortgages. “In general, the typical loan life is five years.”
“People generally hold a mortgage for seven to nine years,” Cashman explained. This is primarily a first-time buyer programme, but we have borrowers of all ages, from seniors to individuals who are five or six years out of college.”
The GSEs do not acquire the loans
In an email, Freddie Mac spokesman Angela Waugaman stated, “A 40-year mortgage isn’t an eligible mortgage (and) so the GSEs can’t acquire them.” We will extend a loan for a troubled borrower to 40 years, and we did so during the pandemic, if the borrower can maintain their property and afford the reduced monthly mortgage.”
In her response, she referred to the Consumer Financial Protection Bureau’s guidelines on what constituted an eligible mortgage. They clearly prohibit a “interest-only” term, in which the interest is paid but the principal is not.
Fannie Mae is in the same boat. When they revised their Selling Guide in August 2013, they phased out the 40-year mortgage. Their guide has been updated to include the Ability to Repay and Qualified Mortgage Rule. It necessitates that a creditor make a reasonable, good faith evaluation of a consumer’s ability to repay a residential mortgage loan in accordance with its conditions.
Senko of ACC believes the GSEs should reassess their attitude.
“Anything they can do to make homes more affordable would be much appreciated.” But I’m not a QM person. I don’t know much about them, but it makes sense. I wouldn’t be surprised if they did (purchasing them).
Loans may involve balloon payments
That’s the word from Detroit-based Rocket Mortgage, which means the loans are made by private lenders like Angel Oak Mortgage Solutions, Sprout Mortgage, and ACC Mortgage and aren’t regulated as a consequence. In addition to paying higher interest, the blog post advises readers that balloon payments on 40-year mortgages are occasionally required.
Rocket spokesperson John Perich declined to comment further on the company’s view on 40-year mortgages, instead directing a reporter to a blog post on the subject.