Fannie Mae Opens the Door to 40-Year Mortgages

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What was Once Considered to be the Forgotten Stepchild of Mortgages Has Finally Become a Productive Member of the Family

Why would anyone want a 40-year mortgage is what you may be asking yourself. However surprising as it may seem, mortgage giant Fannie Mae has decided to go full steam ahead with their newest program after a year and a half of fits and starts.

For the previous six and a half decades, the Federal National Mortgage Association has chosen not to deal in longer term mortgages due to their extended maturity length. However, they have reversed their position and have decided that now is the right time to greatly extend amortization plans. Qualified lenders from coast to coast are now in a position to sell Fannie Mae as many of these extended term loans as possible. This is the first time since the formation of Fannie Mae in 1938, and its becoming a GSE (Government Sponsored Entity) in 1968, that this has been offered to nearly all lending institutions wishing to participate.

In keeping with the slogan "Our Business is the American Dream," Fannie Mae has set out to assist low, moderate, and middle income families during this period of soaring property valuations. Hoping to add to the list of 63 million people that they have already helped acquire homes, Fannie Mae is now willing to keep these mortgages on the books until they go full term. Previously, this was the single most important hurdle that they needed to overcome in order to be able to offer these plans to a full family of investors.

Although it is something that will obviously not be for everyone, 40-year terms will allow many the chance to own what they previously could never afford. By lengthening the amortization schedule, this program will cause monthly payments to decrease, thereby making it easier to qualify. By allowing these terms to be applied to fixed rate mortgages, as well as the many forms of hybrid and adjustable rate home loans, those who cannot afford the monthly payments of a 30 year loan, may now able to do so through a 40 year term. In addition, these same prospective investors will see an increase in their purchasing power.

In contrast, the lower payment of a 40 year mortgage may not be all that attractive, since the interest rate is at least and 1/8 to a 1/4 point higher then the standard thirty-year terms, and the loan length is greater. Also, your budget for amortization cannot go above twenty-eight percent of your monthly income and your combined debt service responsibility may not supersede thirty-six percent. However, if rates remain tolerable and people are able to get their foot in the door, they can always refinance at a later time to a loan with a shorter term and lower rate. All of this may seem like an unnecessary and drawn out affair, but for someone who has looked at a 30-year amortization plan and found themselves standing on the porch looking in through a window, this option may be what opens the door to the reality of ownership.

Forty year loans may eventually gain wide acceptance in the property market, because there are many who are adverse to risk and not willing to tolerate the uncertainty of an interest-only mortgage. No one would have ever thought that property values could have soared in the last year to today's current levels, and no one would have ever believed that interest rates would have gone as low as they have. Consequently, there is no real way of knowing how broad an acceptance these newly allowed 40 year terms will have. But there is always room for one more option, and there is always someone who will avail themselves of an opportunity when no other exists. The only way anyone can know if a 40-year mortgage is the right investment vehicle for them is to explore the possibilities.

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David Levine

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