40 year mortgages

[riverwed070707]

Sorry if I missed it but are we discussing 40 year mortgages yet? I can make an educated guess about this groups opinion but still feels like it warrants a discussion. Anyone know the history of when 30 year mortgages became standard? Was it time for an update to the policy given current housing prices?

[Jluke]

It had been about a month since I checked my credit union’s mortgage rates.

there isn’t a 40-year but I am now seeing an option of a 25-year mortgage. So that’s new.

standard terms have 10, 15, 20 and 30 years.

[ua_guy]

Japan had/has a 100-year mortgage term.
Mortgages in Spain have long required mortgagees to repay the loan by the time they reach 75.

Expensive or competitive situations for housing are...not unique to the US. But we are reaching a point where a longer mortgage term may be required in order to afford to live certain places.

[riverwed070707]

It had been about a month since I checked my credit union’s mortgage rates.

there isn’t a 40-year but I am now seeing an option of a 25-year mortgage. So that’s new.

standard terms have 10, 15, 20 and 30 years.

Its been a few weeks but beginning of March-ish the Federal Housing Administration authorized issuing 40-year mortgages, which previously was not allowed. I'm sure lenders are still figuring out how to structure, but as someone who won't even take on a 30 year mortgage (mine all originated at 15-20) my gut reaction is RUN but also understand the "why now" part of it given I feel like I couldn't even buy a house in today's market... much like -- but perhaps not as bad -- as the new 10 year car loans.

[disneysteve]

40-year loans aren't new. I remember them popping up quite a few years ago. We probably even discussed them here when that happened. That said, I agree with riverwed. They're an even worse idea than a 6 or 7 or 8-year car loan. If you have to spread out the payments that far, it's a glaringly clear sign that you're spending too much. But nobody will listen.

This just feeds a vicious cycle. Why are car prices so high? Because lenders have come up with new ways to finance purchases allowing buyers to "afford" more expensive vehicles. If everyone followed the rules of thumb, car makers couldn't charge as much because nobody would buy them.

[Petunia 100]

The rates on a 40-year mortgage are higher than on a 30-year mortgage. So even though the payments are spread out longer, they aren't much lower at all. I don't see the appeal.

I knew a couple who bought a home with one way back in the 1990s.

[disneysteve]

The rates on a 40-year mortgage are higher than on a 30-year mortgage. So even though the payments are spread out longer, they aren't much lower at all. I don't see the appeal.

Most people are bad at math.

[myrdale]

Most people are bad at math.

Either they are bad at math or completely oblivious to the consequences of their actions past "right now".

I don't expect someone to work out by hand a full amortization table for their mortgage, but I do expect them to say for a $312,000 loan at 6.85%, 30x12x$2,044 = $735,840 vs 40x12x$1,904 = $913,920.

[Fishindude77]

How about 20 year boat and camper loans?
Go to a boat show, in big print they always show the monthly payment based on 240 months. The price is in small print.

[disneysteve]

Either they are bad at math or completely oblivious to the consequences of their actions past "right now".

I don't expect someone to work out by hand a full amortization table for their mortgage, but I do expect them to say for a $312,000 loan at 6.85%, 30x12x$2,044 = $735,840 vs 40x12x$1,904 = $913,920.

I would say maybe 10-15% of buyers do what you spelled out, if that. Most people only focus on today. They only look at the monthly payment and if they can "afford" it. It doesn't matter if it's a house, a car, a boat, furniture, whatever. They don't think for a second about what the total cost will be or how they'll still be making those "affordable" monthly payments years down the road.

I'm sure many of us have had the car sales guy in front of us and when we said, "How much is the car?" they said, "How much do you want your monthly payment to be?"

[myrdale]

How about 20 year boat and camper loans?
Go to a boat show, in big print they always show the monthly payment based on 240 months. The price is in small print.

I put boats & campers squarely in the luxury category, which for me means if you can't buy it with cash, you don't need it.

[kork13]

"Just because you can, doesn't mean you should."

[ua_guy]

I'll play the other side here for a minute.

There is well-intentioned advice here to only buy what you can afford, right now. And then, there is strategic risk-taking which could be aided by something like a 40 year mortgage, which would let someone finance something of greater value now and in the future. See, that's where I think conservative finance falls on its face. There's no acknowledgement that someone's financial trajectory may change significantly for the positive, or that the loan could be refinanced into something much smaller like a 20 year. Now, to ride out a 40 year mortgage to full term...I can't find a lot of sense in that. A lot of people do this wrong and underestimate their risk and recovery strategies, as evidenced by the mortgage collapse of the mid-late 2000's. But that doesn't mean there should be a blanket rule that "nobody" should ever take a 40 year mortgage.

[disneysteve]

I put boats & campers squarely in the luxury category, which for me means if you can't buy it with cash, you don't need it.

I will say there's a difference between "can't" and "choose not to" buy with cash. There have been plenty of times when we financed something that we could have written a check for. Maybe financing was cheaper than pulling money out of well-performing investments. Maybe I just wanted to ensure good cash flow in case we hit any snags. Typically I accelerated the payments. I just liked having that fall back in case we couldn't. I paid cash for my current car but I think I bought the last one with a 6-year loan but I paid it off in 1 year.

Debt, especially over the short-term, isn't all bad. If you understand what you're signing up for and you are using the debt strategically, it can be a perfectly good tool in your financial toolbox. Of course, that doesn't describe the vast majority of borrowers.

[myrdale]

I will say there's a difference between "can't" and "choose not to" buy with cash. There have been plenty of times when we financed something that we could have written a check for........

......Debt, especially over the short-term, isn't all bad. If you understand what you're signing up for and you are using the debt strategically, it can be a perfectly good tool in your financial toolbox. Of course, that doesn't describe the vast majority of borrowers.

I don't disagree. You "could" buy it with cash, but you chose not to. That doesn't conflict with my original statement at all. Part of my line of thought is that if you can buy it with cash, that also implies you have enough in reserves after the purchase to cover your emergency fund, and living expenses. If you have $50k to your name and you blow all on a boat, leaving a $0 balance then yeah that's a problem. Would getting a loan for the boat be "better"? I don't think so as you've shifted too much of your net worth into a luxury item (I'm not even concerned about the price dropping). I don't have a good idea of what a maximum percent of your net worth should be tied into luxury items. 10 to 25%?