40-year loans being tested

Longer term seen as way to boost homeownership

Qualification easier

rates higher

Critics fear bigger burden for debt-laden buyers

October 17, 2004|By Mary Umberger | Mary Umberger,CHICAGO TRIBUNE

A pilot program has begun to test consumer reaction to a relatively rare mortgage, the 40-year, fixed-rate loan.

It's an experiment of 16 credit unions nationwide in partnership with Fannie Mae, which will decide next year whether to offer the loans on a broad scale.

A few banks offer the occasional 40-year fixed-rate mortgage on a customer-by-customer basis, but a stamp of approval from Fannie Mae could standardize such loans.

Officials at Fannie and several lenders see the 40-year loans as a way to turn more Americans into homeowners.

"For first-time borrowers, it lowers a monthly payment and makes a home more affordable," said Fannie Mae spokesman Sandy Cutts. "It also could be helpful in general for borrowers who are challenged by affordability issues, those who live in high-cost areas," because the longer term means they can borrow more.

Critics view the loans as an additional burden for people saddled with debt.

"I thought the point of buying a home was to own it," said Amelia Tyagi, co-author of The Two-Income Trap, an examination of Americans' household debt. "With this thing, you pay until you die.

"Sending the message that it's acceptable not to get that thing paid off for 40 years, that's a dangerous message," she said. "What happens if your roof springs a leak? What if you get laid off?"

Robert Manning, a professor of finance at the Rochester Institute of Technology who teaches financial literacy, says Fannie Mae's efforts to expand homeownership could have the opposite effect. Putting more cash into the hands of first-time buyers, he said, enables them to drive up prices.

"You're bringing more people into the market who shouldn't be there," Manning said. "It makes it more unaffordable for those who want to do the right thing and save for a down payment and get a mortgage that's a realistic length."

A generation ago, the 20-year mortgage was the only option. Now there are dozens of ways to borrow, and homeownership is at an all-time high.

The 40-year loans are easier to qualify for than the 30-year variety and enable borrowers to get bigger loans. The program is not being offered in any Mid-Atlantic region states, Fannie officials said.

Many lenders agree that the longer term can have disadvantages. The 40-year loans' interest rates are one-quarter to one-half point higher than those of 30-year loans.

Then there's the cost. A borrower of $200,000 at 6 percent for 30 years would pay $231,677 in interest. The same amount, borrowed at 6.3 percent over 40 years, would cost $348,420 in interest.

Others regard the 40-year-loans as a palatable alternative to the current popularity of adjustable-rate and interest-only loans, which have a trigger point at which repaying the loan's principal kicks in, raising the monthly cost substantially. For one thing, they say, the borrower builds equity with a 40-year loan.

Fannie Mae's Cutts notes that most people no longer look at their mortgages as lifelong commitments.

The Chicago Tribune is a Tribune Publishing newspaper.

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