Fannie may OK 40-year loans

With home prices soaring across the U.S., more and more lenders are allowing homebuyers to take an extra 10 years to pay off their home loan.

For the past few years, low interest rates have made the traditional 30-year, fixed-rate mortgage appealing for many home buyers. But some lenders have found a growing niche of buyers who want a 40-year mortgage, especially in the Western U.S. where home sale prices are setting records.

The 40-year mortgage concept is nothing new and each lender structures these types of loans differently. Many lenders, such as Washington Mutual, advise consumers to consider 40-year loans if they want to minimize their monthly payment; if they plan to be in the house five years or less and home values in their area are appreciating; or if they want to minimize cash expenses on an investment property.

Those lower monthly payments could also turn more Americans into home owners - the big draw for Fannie Mae, who is currently testing a new 40-year, fixed-rate loan.

Sixteen credit unions nationwide have partnered with Fannie Mae to offer the 40-year fixed-rate loan program. If it's a success, Fannie will decide next year whether to roll out the loans on a broad scale.

"For first-time borrowers, it lowers a monthly payment and makes a home more affordable," said Fannie Mae spokeswoman Sandy Cutts. "It also could be helpful in general for borrowers who are challenged by affordability issues, those who live in high-cost areas," because the longer term means they can borrow more.

A stamp of approval from Fannie Mae could standardize 40-year loans. However, critics say the loan program could be detrimental to the home buyer in the long run. The interest rates on 40-years loans are generally one-quarter to one-half point higher than those of 30-year loans. And the home buyer eventually pays thousands more in interest on the loan.

Robert Manning, a professor of finance at the Rochester Institute of Technology, told the Chicago Tribune putting more cash into the hands of first-time buyers enables them to drive up prices.

"You're bringing more people into the market who shouldn't be there," he told the Tribune. "It makes it more unaffordable for those who want to do the right thing and save for a down payment and get a mortgage that's a realistic length."

But the 40-year loans could become a more palatable alternative to adjustable-rate and interest-only loans, which often take homeowners by surprise when the loan's principal kicks and their monthly payment goes up. Plus, the borrower builds equity with 40-year loans.