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Homebuyers in high-cost housing markets eager to find a way to make monthly mortgage payments more affordable have a new option with Wells Fargo Home Mortgage. The company is launching a 40-year fixed-rate mortgage.
"The primary advantage of a 40-year mortgage is a smaller monthly payment without the risks associated with interest-only loans or Option ARMs," said Joe Rogers, executive vice president, Pricing, Products and Program Management, National Consumer Lending Sales, Wells Fargo Home Mortgage. "A 40-year term reduces monthly payments, making homeownership more affordable."
Home prices have been rising in most parts of the country. According to the National Association of Realtors?, the national median existing home price for all housing types is projected to rise 5.8 percent in 2006 to $220,300.
Interest rates on a 40-year mortgage are expected to be about a quarter- point higher than rates on the traditional 30-year loan, but the longer term results in lower monthly payments.
Additionally, a 40-year fixed-rate mortgage doesn't have the payment shock that's associated with interest-only loans or mortgages bearing adjustable rates. If the buyer plans to stay in the house for a long period of time, they have the confidence they're investing in long-term financial security.
"A 40-year mortgage may be appealing to first-time homebuyers, consumers in high-cost markets, real estate investors and buyers on fixed incomes," Rogers said. "Because it's a fixed-rate loan, buyers have protection from rising interest rates, so there's no need to worry about increasing principal and interest payments."
Rogers added that 40-year terms can give sellers an opportunity to sell a higher priced home that some buyers wouldn't be able to afford with a 30-year mortgage.
Consumers should be aware that with a 40-year mortgage, more interest is paid over the life of a loan when compared to a 30-year loan. In addition, equity builds more slowly. During the early years of a mortgage, the majority of the payments are applied toward interest, not principal, so equity takes longer to accumulate than a shorter-term mortgage. On non-conforming loans, the loan is amortized over 40 years, but balloons in 30 years, meaning the customer must provide a lump sum payment at the end of 30 years to fulfill the obligation of a 40-year loan.
By paying off their 40-year mortgage on a bi-weekly drafting plan, Rogers says consumers can help alleviate some of those issues that longer-term loans present.
"A bi-weekly mortgage drafting plan essentially allows you to make a 13th house payment each year," said Rogers. "In addition to being a great budgeting tool, it can reduce the term of a 40-year loan down to approximately 29 years. That accelerated payment schedule allows you to build equity faster and reduce your overall interest obligation."
For example, on a $400,000 loan balance with a 7 percent interest rate (7.05% APR), Wells Fargo's bi-weekly Accelerated Ownership Program(SM) may reduce the term of the loan to approximately 29 years and save the borrower an estimated $250,000 in interest payments.
Celebrating its centennial year, Wells Fargo Home Mortgage is the nation's No. 1 retail mortgage lender and a leading servicer of home mortgages. As a division of Wells Fargo Bank, N.A., it has a local presence in more than 2,400 mortgage stores and bank branches, plus the capabilities to serve the home financing needs of customers nationwide through its call centers, Internet presence and wholesale lending operations. Wells Fargo Home Mortgage services loans for approximately 6 million customers in all 50 states from its base of operations in Des Moines, Iowa.
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