Feds expand 40-year mortgage eligibility. Experts say it could lead to more.
More homeowners will now be able to modify their mortgage to a 40-year term to reduce their payments, and experts believe the concept could gain steam.
It’s not a new concept, as Fannie Mae, Freddie Mac and other government loan programs already offer some 40-year modification options, but the federal government hopes the change will increase awareness of the availability, according to Peter Idziak, senior associate at mortgage law firm Polunsky Beitel Green.
But there are potential downsides. A 40-year mortgage includes higher overall interest rates and longer repayment terms, which means the owner builds up equity far slower, limiting their ability to refinance or take out a home-equity loan. And if their property declines in value, they can be underwater on a property that would take a decade longer to pay off.
Housing affordability isn’t a new challenge, but it has gotten worse in recent years after the Covid-19 pandemic sent the already tight housing market into overdrive.
At the end of 2022, the median national sales price was $467,700, up from $322,600 in the second quarter of 2020 — a nearly 45% increase. The Home Ownership Affordability Monitor from the Federal Reserve Bank of Atlanta dipped to 68.7 in 2022, the lowest it has been since at least 2006. It has since climbed back to 77.7, but is still far below the affordable market score of 100.
A 40-year mortgage won’t fix these issues, but it puts pressure on policymakers to more widely roll it out, said Jack Prenter, CEO of Canada-based DollarWise.
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