Want to buy more house than you can afford? Get a 40-year mortgage!


Yes, Virginia, there is such a thing as a 40-year mortgage. And some people are apparently using them (!) I was doing a bit of reading on bankrate.com today (doing some research, as I’m considering buying the duplex that went up for sale next door to me), and saw a banner ad from a mortgage company that had a list of mortgage rates. All of the usual fixed loans were represented — 30 Year Fixed, 15 Year Fixed, 10 Year Fixed. The ARMS were all there, despite the bad press they’ve gotten lately with all of the people who bought on ARMS that are now coming, causing the banks to foreclose on them. I could click on 7 Year ARM, 5 Year ARM, 3 Year ARM, 1 Year ARM. There were also Home Equity Lines and Second Mortgages. All normal stuff.

But then it started looking sketchy to me — this company is listing some products that I had previously thought of only as “creative financing solutions” on their ad. The kinds of products that may not get people into as much trouble as the ARMS have caused, but really make me wonder what the point is to buying at all — why not just rent, if your option is a 30 Year Interest Only loan? If you buy a house, and pay only interest on the principal for 30 years, you’re never paying down the principal. You are, of course, banking on the value of your house going up, and gaining that equity, but that is technically speculation.

This particular ad also listed 5 Year Interest Only, 3 Year Interest Only, and 1 Year Interest Only options. I’m really curious as to what happens once the interest only period is up — do you owe a balloon payment? Do you go to a normal fixed rate loan?

And last, but not least, the product that surprised me the most…. the 40 year fixed mortgage. Wow. When my parents were buying their first house, most people used a 15 year mortgage. When I bought my duplex, a 30 year mortgage was standard — I had heard of 40 year mortgages being used in places like New York and San Francisco where prices were going up so fast that there wasn’t any way for many people to afford a house on a 30 year fixed. I haven’t figured out an amortization schedule for a 40 year fixed, but really, how much more interest do you end up paying over those extra 10 years? And is it really worth it? Wouldn’t you be better off renting, saving up more of a down payment, or just buying a less expensive house?

40 years is a long time. If I were to buy a house on a 40 year mortgage, at age 35, I would be making mortgage payments well into retirement. Have we gotten past the days where people paid off their houses, and paid only property taxes and insurance in their old age? Real estate is supposed to be the way that most americans build wealth, but I can’t see how that can continue if we’re all still making mortgage payments in our old age. That, or making interest only payments for 30 years. We’ve all been told that real estate is a sound investment, that it’s one market that’s been reliably stable over the long term, and that it’s a powerful wealth bulider. However, at what point in the creative financing realm does this cease to be true? If no one ever actually pays off their houses, are we really building wealth? In a normal market (as opposed to the the real estate boom of the early 2000s), creative financing may not be any better than renting. Or buying a smaller house.


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