CARRIE STRUBE
‘Significant’ savings
While banks and mortgage companies have been offering 40-year mortgages for a few years, credit unions are only recently beginning to show interest. With the help of a pilot program from Fannie Mae, the Credit Union Mortgage Exchange is the latest in the industry to offer the 40-year mortgage.
Vermont-based CUMEX, which has a Massachusetts office in Lexington, works primarily with credit unions and their membership. Credit unions will either refer members to CUMEX for loan servicing or CUMEX will purchase loans from credit unions in the New England area.
As home prices continue to rise, banks and mortgage companies are finding alternative mortgage products to ease the burden of a high mortgage payment. The 40-year mortgages have become popular with banks such as Hingham Institution for Savings. That bank, which serves a handful of affluent towns on the South Shore, recently began offering their 20/20 mortgage product, which has a 40-year term with one single-rate adjustment after 20 years.
Carrie Strube, vice president and director of lending for CUMEX, said credit unions are trying to find ways to turn more Americans into homeowners.
“Home values just continue to increase, especially in New England, probably at a much faster rate than most consumer salaries have been increasing,” Strube said.
In order to get more people into homes, CUMEX recently received approval through Fannie Mae to offer 40-year mortgages through a pilot program that is currently only being offered through a handful of credit unions nationwide.
The 40-year, fixed-rate mortgage is expected to appeal to first-time homebuyers and current homeowners who are looking to relocate to higher cost areas, according to a CUMEX statement.
According to Strube, if a homebuyer put down 10 percent on a $250,000 home, the mortgage would be $225,000. With a 30-year fixed rate of 5.75 percent, the principal and interest payment would be approximately $1,313 per month. On a 40-year mortgage at 6 percent, the principal and interest payment would be approximately $1,238. The savings would be approximately $75 per month.
“So, to extend it for another 10 years, the homebuyer is going to save [$75] monthly – which, to someone purchasing a home for the first time, could be significant,” Strube said.
There are some drawbacks. The length of the loan is increased, therefore increasing the total amount of interest paid during the life of the loan. Strube, however, said that is a small detail since most homeowners stay in their home for an average of four to seven years.
Imperfect Timing
According to Sandy Cutts, spokeswoman for Fannie Mae, the pilot program has been around since September of last year. Fannie Mae’s Credit Union Advisory Council created the idea to offer the program to credit unions. Currently, there are 22 credit unions nationwide participating in the program. Credit unions in Rhode Island, New York, Oregon, Colorado, Utah and Michigan are participating in the pilot program.
Cutts said there is a lot of interest in the 40-year mortgage product, but with low interest rates this past year, it has not been the ideal product for many people.
“Timing for the pilot program is not quite optimal,” Cutts said.
Rob Kimmett, senior vice president of marketing and public relations at the Massachusetts Credit Union League, said credit unions are not offering 40-year mortgages at the same rate as banks and mortgage companies.
“It is a product that has fairly limited use,” Kimmett said. “It’s a product … that is a niche product.”
He said there appears to be a certain profile of a consumer who is interested in the mortgage.
“It can give a first-time homebuyer more buying power,” Kimmett said. “If it fits the consumer properly, it could be advantageous.”
Because the 40-year mortgage is a pilot program, Fannie Mae did not advertise the product.
“It is a test,” Cutts said.
Strube said she read about the program in a credit union publication and inquired with Fannie Mae about participating.
Kimmett said with the pilot program, Fannie Mae has been collecting data about the 40-year mortgage and keeping track of the demand for it.
After some time, Fannie Mae will determine if the program is worth keeping or if it needs to be “tweaked,” Cutts said.
Since signing the agreement with Fannie Mae on Dec. 14 and announcing the product, Strube said she has received an “overwhelming” response from credit unions. About 10 institutions have inquired about the product as of Dec. 20, she said.
According to Cutts, Fannie Mae will review the performance of the loans sometime next year. At that point, the company will make a decision to expand, modify or offer the loan as an actual product.
The 40-year mortgage concept has received mixed reviews from bankers and other lenders. As previously reported in Banker & Tradesman, many lenders in the Bay State offer a 40-year product, but tend to guide consumers toward another type of loan first.
Like some banks, Kimmett said credit unions have not heavily marketed the 40-year loan.
“It is something that has not been particularly prominent among credit unions,” Kimmett said.
In order for more credit unions to begin offering the loan, Kimmett said there would need to be more consumer demand.
Another product banks and mortgage companies have been promoting in recent months is the interest-only mortgage. An interest-only loan allows a borrower to pay only interest on his or her outstanding balance for the first few years of the loan. After that, the payment readjusts to include principal and interest and the loan is re-amortized for the remaining years.
On the same day CUMEX signed its agreement with Fannie Mae, the company also began offering an interest-only adjustable rate mortgage. The loan is a variable rate product that provides for an initial fixed-rate period of three, five or seven years.
In the past, some analysts have said the push for the interest-only loan is due to rising housing prices in the area and the demand for bigger homes.
Kimmett said the interest-only mortgage is also a product that has not been prominently offered in the credit union industry.
