Many homeowners are considering the extension of their home loan terms to 40 years so they could reduce their monthly payments to affordable levels and cut down their risks of losing their homes to foreclosed inventories.
But according to financial analysts and mortgage brokers, this strategy may not be a good remedy to solve foreclosed home problems.
Mortgage broker Jeff Lazerson explained that the comfort of paying lower monthly payments may not be a great advantage in the long run. He said 40-year loans usually have higher interest rates so the loan actually costs more in the end.
Extending a home loan term from 30 years to 40 years would not substantially decrease the monthly payment, according to mortgage brokers.
An example is a $100,000 home loan taken out at 5 percent. If this loan is amortized over 30 years, the monthly amortization would be $536. On the other hand, if it is amortized over 40 years, the monthly amortization would be $482, giving a monthly savings of only $54.
The projected savings would even get smaller if the typically higher mortgage rate imposed on 40-year loans is used. Using the higher rate of 5.25 percent, the monthly amortization would be $499, reducing the projected monthly savings to only $37.
The advantage of making lower monthly payments is also wiped out by the reality that overall total loan payments are much higher for 40-year loan terms than 30-year loan terms for the same loan amount. The above example would add $46,560 to total home loan payments in a 40-year home loan term.
However, despite the total cost disadvantages, a 40-year home loan makes sense if it is the only way a homeowner can save his house from becoming a foreclosed property.
Mortgage broker Robert Satnick said there are homeowners who need the lowest possible monthly payment for many years. A 40-year home loan term is the only loan term that some people can afford.
Satnick explained that despite the very low monthly payments, the homeowners are still making a dent on their home loan little by little.
Some 40-year home loans are also accepted by Fannie Mae in their guarantee program. Fannie Mae approves this kind of home loan for families eligible under special affordability and home ownership provisions.
Under the federal foreclosed housing program, homeowners can choose the 40-year loan term if it is the only way they can afford monthly loan payments and if it is the only way they can prevent their homes from being foreclosed.
Joseph Smith has been educating buyers on the finer points of
Foreclosed Housing Prevention at FindForeclosureProperties.com for over five years.
