MICHAEL SINCLAIR
Product’s ‘time is here’
Where will you be in the year 2044? Most people aren’t sure where they will be in four years, never mind 40 years, but mortgage lenders are beginning to offer mortgages with 40-year terms.
As people’s ideas about homeownership change and housing prices continue to rise, many lenders say they don’t expect their borrowers to stick with the same home for four decades, but a 40-year mortgage term may nevertheless be a sound option.
Hingham Institution for Savings recently introduced its “20/20 Mortgage,” which has a 40-year term with one single rate adjustment after 20 years. The bank will loan up to $2 million via the product, which can be helpful for borrowers in the affluent but pricey towns of Hingham and Cohasset, the bank’s primary service area.
Michael Sinclair, vice president of retail lending at Hingham Savings, said the product is designed for those looking for the security of a fixed rate since there is only one rate change, which comes in the 20th year of the loan. Pricing a single rate for the entire 40-year term would have also been difficult for the bank, he said.
“The time for 40-year mortgages is here,” said Sinclair, adding that such products often give borrowers more options and flexibility.
Sinclair concedes it is unlikely that many of these mortgages will still exist when the time comes to adjust the rate.
“I don’t expect any of the loans will be on the books in 20 years,” Sinclair said.
Sinclair, like others in the mortgage industry, said that few borrowers will stay in the same home for 40 years.
“I even struggle with the [idea that consumers will hold a] 30-year [mortgage for the life of the loan],” said Brian Koss, New England regional vice president at Countrywide Home Loans. Countrywide does not currently offer the 40-year term mortgage in the commonwealth but does in California. The Golden State boasts the highest real estate prices in the nation, but housing costs in states like Massachusetts, New York and Connecticut also have risen sharply.
So why offer such a lengthy term?
“It’s about getting the payment as low as possible,” said Koss.
Fred Ginches, regional manager at New Boston Mortgage in Wakefield, said while the rate is slightly higher on a 40-year mortgage, the length of the loan allows for lower monthly payments and borrowers are able to qualify to borrow larger amounts. The latter can be of great benefit to homebuyers in areas where housing costs are high.
Ginches said the typical 40-year mortgage borrower often is someone with “a little too much” credit card debt who is struggling to qualify for a certain loan amount.
‘Tax Advantages’
James Madigan, president of Leader Mortgage in Arlington, said different people may benefit from the 40-year loan. For buyers looking to move up to larger living spaces, the product works well for cash- flow purposes.
For first-time buyers, Sinclair said, the mortgage is appealing because the payments are low.
Leader Mortgage has offered a 40-year mortgage for about four years, but only in the past six months has it really gained popularity among borrowers. Madigan said less than 10 percent of the loans at Leader Mortgage have 40-year terms, but the percentage is increasing. Interest-only mortgage products also are on the upswing at Leader, slightly outstripping the growing demand for 40-year loans.
New Boston Mortgage has offered loans with a 40-year term for about six months, but Ginches said there has not been a huge demand for them.
“It’s a product that is getting limited use,” he said.
At Sherwood Mortgage in Boston, a 40-year term is only offered as a 5/1 adjustable rate loan and Senior Executive Vice President Linda Bates said there has not been a lot of demand.
“The demand is low because once we give consumers other options, it [usually] is clear that the other options are better for the consumer,” said Bates.
Sherwood Mortgage has had inquiries about the mortgage, but no closings using the 40-year term. As of last week, Sherwood’s 40-year adjustable mortgage rate was priced at 5.25 percent, while the firm’s 30-year adjustable loan carried a 4.875 percent rate. Although the 40-year loan offers lower monthly payments, the total repayment ultimately made by the borrower is higher, causing many to shy away from such mortgages, Bates said.
Ginches said the impetus for offering mortgages with 40-year terms was primarily because income levels have not kept up with escalating house prices.
Koss said those economic dynamics are acute in California, where home prices are extremely high. Loans with 40-year terms also are very popular in California because borrowers and lenders are much more comfortable with them. Koss said 40-year mortgages have been offered in California for the last 10 to 15 years, but demand slowed when fixed interest rates dipped to historic lows.
Charlie Nilsen, regional executive vice president at Gateway Funding in Woburn, said mortgages with 40-year terms have been offered by Gateway for a decade. The product became more popular in the last two years, Nilsen said, because home prices in the Bay State continued to soar.
Nilsen said that few borrowers stay in the same house for the long run and consumers are beginning to use mortgage products, like those with 40-year terms, as financial tools. Such products allow borrowers to keep cash available or invest money in other areas because of lower payments.
Nilsen said the monthly payment for a 40-year mortgage typically is about $42 less than the monthly payment on a 30-year loan for every $100,000 borrowed.
In a recent Hingham Savings advertisement for the 20/20 Mortgage, the bank compares monthly payments for a $250,000 mortgage. With the 20/20 Mortgage at a 5.875 percent interest rate, monthly payments would be almost $1,354. According to the advertisement, monthly payments on 30-year fixed mortgage with an interest rate one-quarter percent higher would be $1,519.
While there are a growing number of 40-year mortgages being offered, Hingham Savings is touting its specific product as the first in the state because of the fixed rate it offers during the first 20 years of the life of the loan. Leader Mortgage, like Sherwood Mortgage, offer the 40-year term only as an adjustable-rate loan.
Despite the lower payments, the borrower ultimately pays more in interest, making the 40-year mortgage a profitable product for banks.
Nilsen said the secondary market has been very receptive about purchasing 40-year loans.
Because very few people plan to stay in the same home for 40 years, a mortgage payment can be viewed as another form of rent. But Nilsen said despite the mobility of society, owning a home is still better for one particular reason.
“The tax advantages with this [40-year mortgage] product are hard to beat,” Nilsen said.
Although the term is longer and more interest is paid out, Nilsen said the interest on the mortgage payment is tax-deductible.
“It is an attractive comparison to renting,” said Nilsen.
Renters can deduct 50 percent of the rent paid or $3,000, whichever amount is less, on their Massachusetts tax forms.
While it could still happen, Koss said he doesn’t expect that Countrywide will offer mortgages with 40-year terms in Massachusetts.
Madigan said he has observed that different mortgage products can become fads. He noted that when a specific mortgage becomes a hot topic, everyone wants it.
Unlike the interest-only loan, which is geared toward borrowers with varied sources of income, Koss said the 40-year mortgage doesn’t benefit those types of borrowers. With interest-only loans, the borrower pays only the interest for the loan for the first five or 10 years and subsequently begins paying down the principal amount. With the 40-year term, Koss said, the borrower is “pushing off” their payments by prolonging the term.
Ginches said New Boston tries to interest borrowers into another product before offering the 40-year mortgage. He said most people are better off with a shorter-term adjustable-rate loan.
Despite some of the drawbacks of the 40-year term, there are still positive aspects as proven by the success in its initial offering at Hingham Savings. Sinclair said there have already been a handful of 40-year loans that have closed since they were first offered in May. Real estate brokers in the South Shore area served by Hingham Savings also have expressed an interest in learning more the product, Sinclair said.
