Fannie Mae to Boost 40-Year Mortgages
40-year mortgages, which currently account for less than 1% of all outstanding mortgage debt, will soon get a boost soon from Fannie Mae. The company announced last week that it plans to make the extra-long term instrument a standard product. We’re not sure why there will be much demand, as a 40-year borrower only saves…
40-year mortgages, which currently account for less than 1% of all outstanding mortgage debt, will soon get a boost soon from Fannie Mae. The company announced last week that it plans to make the extra-long term instrument a standard product. We’re not sure why there will be much demand, as a 40-year borrower only saves about $30 per month per $100,000 of balance (the 40-year tends to carry about a quarter-point rate premium over the 30-year). As far as we know, no one on his death bed has ever wished he’d taken out an extra ten years on his mortgage.
Fannie Mae Plans to Increase Buying of 40-Year Mortages [WSJ]
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It’s pretty close to an I/O at that point..not a good way to build equity.
Why would the interest rate premium go away? The quarter point premium is duration risk. 10 extra years of risk has to worth something. If you think about it a quarter point above the 30 might not be enough of spread.
I’m guessing that once Fannie makes this a standard product that interest rate premium will go away. Right now the secondary market for these loans is more limited than the 30-yr loans. Since they are harder to resell, the borrower pays a little more. The same is true of Jumbo loans.
It will be interesting to see where the rates end up and whether this becomes a product that catches on. While the extra 10 yrs isn’t great, the risk will be less than the ARMs that people are going for to bring down their payments.