40 year Mortgage?

Question

I have heard mention and talk of this but have never seen proof that it actually existed before the financial meltdown.

I am just curious to see what you guys think about a 40 year mortgage product and if there actually was or still is one what are the terms? ANy different then the conventional 30?

Lets hear the good, bad and the ugly.

In my opinion, on an investment property I think it can add value as you are reducing your overall monthly debt service payments therefore increasing your + cashflow. OTOH the additional interest cost incurred may turn alot of people off as well as banks probably charging an uptick in rate for this?

On a primary  don't think I would be interested as the payments would be coming out of my pocket VS a tenant's rent.

regards,
Chris

Jesse Gonzalez · Answer

I only know of one portfolio lender that offers a 40 year am payment.  It definitely is not the norm.  I would probably find value in an interest only loan before I looked toward a 40 year am payment.  Yes, the interest payment is larger for a 40 year term, but how long are you really going to keep the loan, all of them are front loaded with interest anyways.  If your goal is to cash flow and the only way you can achieve that is with a 40 year loan then I wouldn’t see any harm in going that route, but again I’d shoot for an interest only loan first if it’s available.  It just depends on your long term goals with the property really.

Michael Smith · Answer

I don't know of any lenders who offer their 40-year loan to investors... Typically it is only available for an owner-occupied primary residence.

Paul Cordero · Answer

Most lenders did away with the 40 year amortization term.  It was a 30 year loan with a balloon payment due at end of that term.

I don't think these loans are desirable to most investors purchasing in the secondary market.

Russell Monson · Answer

I was a mortgage broker pre-crash, and there were several sub-prime lenders who were offering (and closing) 40 & 50 year mortgages.  These were all subprime however, and were an attempt to get people's payments as close to interest only as possible without causing a payment shock when the interest only period ends and the loan becomes fully amortizing.  They were offered as both adjustable and fixed rate products, but since they were subprime they weren't usually priced competitively with the FNMA FHLMC money.  Not sure if the FNMA or FHLMC ever offered these longer amortized terms, but I never saw them or closed any.

Eric Gutierrez · Answer

I don't think there would be enough of a savings in your monthly cashflow to justify it in my mind (longer payoff period/ getting a lender that would do it on an investment property).

Assuming you pay 4% interest on all three 15, 30, 40 year notes and the loan amount is 100k.  Your payments would be roughly $740, $477, $418.  You would have an extra $59 in cash flow by extending your mortgage for 10 years.  I'd imagine in the real world you would have a higher rate on the 40 year note that would eat up most if not all of that $59.