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Many mortgage options exist for those looking to buy a home, but recently local banks have added another ¡ª a 40-year mortgage.
The 30-year, fixed-rate mortgage remains the most popular option, but the longer-term product was created to help borrowers keep their mortgage payment down, said Rich Swerbinsky, vice president of secondary marketing for Home Savings & Loan Co.
Home Savings began offering a 40-year, fixed-rate mortgage nine months ago.
"We've had a lot of success with it," Swerbinsky noted. "We're doing six or seven of them a month, which is pretty viable."
"It gives more options to people," said Karen Clower, vice president and manager of mortgage lending for Cortland Banks. The bank began offering 40-year mortgages, both fixed- and variable-rate, earlier this year, though no one has used either product.
The option expands opportunities for home buyers by decreasing monthly payments, said Joe Noss, vice president of marketing for First Place Bank.
Lower monthly payments
By spreading mortgage payments out over an additional 10 years, home buyers decrease their monthly payment by about 5 percent compared with a traditional 30-year fixed-rate mortgage, Noss said. First Place offers a 40-year fixed-rate mortgage and a 40-year product that is five-year adjustable.
Primary users of this product, Swerbinsky said, are people looking to buy a home who can't afford the payment on a 30-year fixed-rate mortgage. Also using it are those who want to buy a more expensive home; amortizing their mortgage over an additional 10 years may lower their monthly payment sufficiently to afford a larger home.
At this point, Clower said, the product is so new that many people are not aware of the option.
"But also," she added, "some people are nervous about having a mortgage out there for 40 years."
Drawbacks
And for good reason: There are drawbacks to the 40-year, fixed-rate mortgage.
"You're building equity slower," Swerbinsky noted. "One of the byproducts of a longer amortization and a lower monthly payment is less money is going to your principal amount of your loan each month."
So the borrower who uses a 40-year, fixed-rate mortgage is going to pay more interest in the end than the borrower who goes with 30 years.
Also, interest rates on a 40-year loan tend to be higher than those on a 30-year, Swerbinsky said.
"Each customer has to look at their own individual needs and evaluate," Noss said.
"There are advantages to owning a home as opposed to renting," Noss concluded. "If you decide to trade up, you have the possibility of resale and you're the one who gets the equity."
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