Homebuyers now have more mortgage options, including longer amortizations. In some markets, 30- and 40-year home loan amortizations have been around for a long time. Lenders and real estate professionals say 40-year mortgages are now becoming more widespread and even 50-year mortgages are available.
“I do see these longer amortizations as a growing trend since lenders will always be looking for a way to drive consumers to the financial markets,” said Cynthia Joachim, a Biloxi broker and former president of the Mississippi Realtors Association. “As one national lender put it, the mortgage industry is now much like a beauty pageant with the consumer choosing the prettiest deal.”
Dan Zoble of Hancock Bank says the 40-year mortgage amortization isn’t a new idea and in the past was associated with adjustable rate mortgages. In June 2005, Fannie Mae announced that it would buy the 40-year mortgages.
“For the lenders that sell in the secondary market, that meant a new product to offer their clients,” he said. “Shortly thereafter, some lenders began offering the 50-year mortgage. I imagine it was a more-is-better mentality. To my knowledge, these 50-year mortgages are not being offered through Fannie Mae or Freddie Mac conduits. They are being offered as ARMs and they are marketed as an alternative to the interest-only and pay option ARMs that have received so much attention in the last four to five years.”
Zoble, mortgage division manager for Hancock Bank, calls these products exotic and says they usually coincide with rising rate environments and/or periods of rapidly increasing home prices.
“The object of course is to lower the monthly mortgage payments with hopes of keeping the American dream of home ownership continuing on at a strong pace,” he said. “The reality is that without these more innovative mortgage products, many people in these high-cost markets could not afford to buy homes. The sad truth is that these products will be used by some lenders to help borrowers buy homes they really can’t afford.”
Dottie Collins, a Greenville Realtor, hasn’t seen these extended mortgages locally but has observed them in California where her two children live.
“So many of the homes I have seen advertised (in California) are not even nice but have high prices,” she said. “California is having a correction of their market presently. Also, interest-only loans have been popular there so people can find homes, but this has proven to be a real problem since the value of homes has gone down. You will probably see 40- or 50-year mortgages in some places, but I would compare this to the interest-only loan because this is what you are paying the first several years of your mortgage.”
Collins thinks homeowners are almost renting since they are not building equity in loans of this length. “Homeowners could also ruin their credit if they are paying interest the first several years and the value of the home goes down or they lose their job; their credit would suffer,” she added.
Quentin Whitwell, executive director of the Mortgage Bankers Association of Mississippi, says the longer mortgages are one more tool to helping consumers buy homes. Banks in Mississippi have been offering them for a while now along with some specialized 50-year mortgage products. Rates are typically higher than on 30-year mortgages.
“The 40-year mortgages came along with the increase in home prices over the last several years,” he said. “As the price of homes went up, some potential homeowners have needed the 40-year amortization in order to be able to handle the monthly mortgage payments. We have seen quite a number of these loans being done in Mississippi but not like other parts of the nation has seen.”
Joachim sees a number of factors contributing to this growing trend. “The real estate markets are volatile nationwide. Prices have come down, properties are staying on the market longer than they ever have in the last five years and it is truly a buyer’s market,” she said.
“Even in markets where prices are coming down, the average price of housing in states like California or New York exceeds the purchase capacity of many homebuyers, so anything that will increase the affordability of housing is seen as a positive thing.”
Joachim and Zoble liken the longer mortgage terms to the increasing terms of automobile loans as prices have grown. However, Zoble says the longer terms have a down side in both instances.
“The longer amortization means the homeowner will pay more interest over the life of the loan and build equity much slower. Many folks who have financed automobiles on five- to seven-year terms understand what it means to be upside down on their car — owe more than the car is worth,” he said. “That same possibility exists in the real estate world in periods of declining home values; the potential for being upside down on a home is exacerbated by the longer term loans.”
Factor in rebuilding?
Noting that the 40- and 50-year mortgage terms were until recently unheard of in Mississippi, Joachim said, “With the cost of construction, the high cost of land and over-the-top insurance rates, this should be a great stimulant to the residential market on the Coast as it should reduce the monthly note where our affordable housing is so limited.”
She adds that prior to Hurricane Katrina, there was a reasonable correlation between what people made salary-wise and what they could afford to pay in a mortgage note or rent.
“Today, the spread is so far apart with the increased costs and lack of product, it is shocking,” she said. “As with any type of creative financing, the consumer should understand fully that there are risks with loan terms this long and banks will each have their own set of terms, including throwing in adjustable rates, balloon payments and 40 years due in 30 years.”
Contact MBJ contributing Lynn Lofton at firstname.lastname@example.org.