Federal Reverse goes all in on 40 year mortgages

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40-Year Mortgages: What They Are, And Why They Might Not Be Worth It For Borrowers:

30 Vs. 40-Year Mortgage

The term of a 40-year mortgage is 10 years longer. This falls under the “duh” category, but you’ll spend longer paying it off, so it’s worth reiterating.
The payment on a 40-year mortgage should be cheaper. Because you have 10 years longer to pay it off, it would take a dramatically higher interest rate for the payment to be the same or higher than it would on a 30-year mortgage.
You’ll pay more in interest. We’ll show our math in a minute, but a 40-year mortgage will cost you more over the life of the loan than a 30-year mortgage.
These could come with higher interest rates and other fees. Because 40-year mortgages aren’t bought by major mortgage investors, they could charge extra fees and have other clauses that aren’t allowed by the major investors.

The Downsides Of 40-Year Mortgages

You’ll Pay More In Interest
With a 40-year mortgage, you’ll end up paying more interest on the loan. This happens in a couple of ways.

First, because there’s a longer payoff, lenders and investors who are interested in these loans will often charge a higher interest rate to give you one. However, you’ll likely end up paying more in interest even if the interest rate is the same or even lower. The reasoning for this has to do with the way loan amortization works. At the beginning of your loan, more of your payment goes toward interest than principal. Over time, this balance flips, but the longer your loan, the longer it takes for that to happen.

As a quick example, let’s do the math. Let’s assume a $225,000 loan amount on a house with a $250,000 purchase price at 4% interest. With a 40-year mortgage, your monthly payment is $940.36. The total interest paid is $226,373.55. On a 30-year term, the monthly payment is $1,074.18, but the total interest paid over the life of the loan is $161,706.39 – a significant difference.

The Federal Housing Administration (FHA) is moving to expand its COVID-19 loss mitigation “waterfall” by introducing a 40-year loan modification option and is asking the mortgage industry for input.

The proposed rule, published by the Department of Housing and Urban Development late last week, would change repayment provisions for FHA borrowers, allowing lenders to recast a borrower’s total unpaid loan for an additional 120 months. HUD said that this option could prevent “several thousand borrowers a year from foreclosure.”

By prolonging the length of the recast mortgage from 360 months to 480 months, borrowers will have more sustainable monthly payments, the department said. The proposed rule noted that a lower monthly payment will help bring a borrower’s mortgage current, prevent imminent re-default, and of course, help borrowers retain their home.

The proposed rule will specifically be beneficial for FHA borrowers who recently exited government-mandated forbearance but are struggling to make their mortgage payments because of COVID-19 related financial hardships.

Alongside benefitting borrowers, the rule would also reduce losses to FHA’s Mutual Mortgage Insurance Fund as fewer properties would be sold at a loss in foreclosure or out of FHA’s real estate-owned inventory, HUD said.

A recent report published by the FHA revealed that as of December 2021, 7.28% of FHA loans were seriously delinquent, down from a seasonally adjusted high of 12.04% in March 2021. However, the rate is still elevated compared to pre-pandemic times.

HUD added that borrowers who opt for a 40-year loan modification would be subject to slower equity accumulation and additional interest payments, but that the positive outcome of a borrower being able to retain their home should outweigh any negatives.

If implemented, the rule will align the FHA with other government entities, such as Fannie Mae, Freddie Mac, and the United States Department of Agriculture, which already provide a 40-year loan modification term option.

In June 2021, Ginnie Mae announced that it was set to introduce a 40-year mortgage term for its issuers, but that the terms and extent of use of the new pool type would be ultimately determined by the FHA.

Three months later, the FHA posted a draft mortgage letter proposing a 40-year loan modification combined with a partial claim.

However, industry stakeholders, including the Housing Policy Council and the Mortgage Bankers Association, sought more time to adjust to the change. HPC and the MBA asked the FHA to delay the implementation of the new term until the first quarter of 2022. They also asked the government agency for a 90-day window to start offering the loan modification.

“The demand on servicers to implement a wide array of policy changes over the last several months has been challenging and we expect this to continue well into the first quarter of 2022,” they said in a letter to FHA.