Pros and Cons of 40-Year Home Mortgages

Alex Chadwick talks money with Day to Day personal finance contributor Michelle Singletary. This week, they discuss the pros and cons of 40-year home mortgages

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ALEX CHADWICK, host:

It's Tuesday. We're going to leave you with a little more financial advice from DAY TO DAY personal finance contributor Michelle Singletary.

Michelle, we've talked before about these 40-year mortgages. There's something new with them. But first, before we go on to that, review for me, how does a 40-year mortgage work, just 10 more years of paying?

MICHELLE SINGLETARY reporting:

Pretty much that's it. It stretches out the payment 10 more years, and it acts just like a 30-year fixed mortgage.

CHADWICK: So you monthly payments are a little lower, but they go on for a lot longer.

SINGLETARY: Yeah, that's right. And you know, they're not that much lower, I mean, maybe about a hundred dollars, depending on the loan. Say, for example, you have a $350,000 loan at a interest rate of 6 percent. Your monthly payment would be $2,098 a month, not including taxes. If you take that same loan, $350,000, over 40 years at an interest rate of 6.25 percent, because a 40-year loan is going to cost your more, your monthly payment would be 1,987 for a difference of about $111. Now that's not chump change, but as you can see, it's not that big a savings. And look at the interest difference. For that 30-year fixed, you're going to pay $405,000 in interest. For the 40-year loan, it goes up to $603,000.

CHADWICK: All right. Well, nonetheless, here's this development that we mentioned earlier. Fannie Mae has recently decided to start buying these mortgages. Why did they make that decision, and what difference does that make to you and me?

SINGLETARY: It makes a huge difference. They had a pilot program, and they decided that because there's so many people who can't afford homes in major areas--I mean, if you live in California, you know exactly what I'm talking about. If you live on the East Coast, you know what I'm talking about. It's hard for first-time home buyers and people with low to middle income to afford a house in major areas in the country. And Fannie Mae thought if they introduced a product that would give people a little bit of a breathing room that more people would be able to afford a home. And as one of the officials at Fannie Mae said, you know, $111 for some people may not seem like a lot, but for some folks, that's the difference between a couple bills being paid.

CHADWICK: Do you think lenders have just gone too far in offering non-traditional mortgages, 40-year loans and interest-only loans? Are these just things you should try to stay away from at all costs?

SINGLETARY: You know, I talked to a lot of housing advocates, people who advocate for people who want to buy a home. And they say that we ought to be very cautious about some of these products. Yes, it does allow some people to get into a home who would not normally be able to own a home. And listen, in America, the way to wealth, the path to prosperity is home ownership. It's not stock ownership. It's not commercial real estate. It's home ownership. That's how people create wealth, so it's important for them to own a home.

But again, these products have a lot of caveats, a lot of things that you ought to be careful about. For example, 40-year loans, you're not going to build up as much equity if your house isn't appreciated. You need to be very cautious when you get one of these loan products such as a 40-year loan or an interest-only loan.

CHADWICK: Michelle Singletary writes the syndicated column The Color of Money for The Washington Post, and she is DAY TO DAY's weekly finance expert on Tuesdays.

Michelle, thanks again.

SINGLETARY: You're so welcome.

CHADWICK: And you can send questions to Michelle by going to our Web page, npr.org. Just click on the `contact us' button.

DAY TO DAY is a production of NPR News with contributions from slate.com. I'm Alex Chadwick. I'll be gone for a couple of weeks. Madeleine Brand is going to be here.

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