40 and Long

Effective June 1, 40-year mortgages will be eligible for delivery to Fannie as a standard product, company spokeswoman Sandra Cutts told MortgageDaily.com.

The decision was disclosed by Tom Lund, Fannie’s acting executive vice president of single-family businesses, at a panel session during a mortgage banking conference held in San Francisco last week, Cutts said.

The 40-year mortgage “is nothing new,” the spokeswoman said, adding that it has been around since the late 1980s. However, it was until 2003 that Fannie started buying 40-year mortgages under a pilot program exclusively with credit unions.

Now, rising rates and home appreciation have pushed Fannie to standardize the loan to “make homeownership more affordable,” Cutts said.

The 40-year loan carries an interest rate that is on average about 0.25 percent to 0.375 percent higher than the 30-year mortgage, yet allows a lower monthly payment, the spokeswoman said.

While the monthly savings, for payments on a 40-year compared to a 30-year, are not material, some people would not be able to afford a home otherwise. For others, the monthly difference translates to money for other expenditures, or to a good amount of money saved over time.

The soon-to-be-standard loan product, however, “is not right for everybody,” Cutts said, noting that borrowers build home equity at a much slower pace and end up paying much more in interest over the life of the 40-year mortgage than on loans with shorter amortization periods.

Fannie will officially make the 40-year mortgage standard when it issues the Selling Guide Announcement to lenders at the end of the month, the spokeswoman said.

Borrowers, struggling to maintain incomes that keep up with rapidly increasing home prices in many major U.S. markets are turning to alternative programs such as interest-only programs, higher loan-to-value loans and adjustable rate mortgages. While there is the short term advantage of getting into a higher priced house, possible repercussions include less equity down the road, rising monthly payments that the borrower cannot keep up with or a balloon payment refinanced at a time when rates may be higher.