People are more familiar with the 15 and 30-year mortgage terms; lenders have offered the two options for years. There is, however, a third option, the 40-year mortgage option.
It represents an extended mortgage term that allows you to make lower monthly mortgage payments for a certain period of time. And though the 40 years may sound like a very long time, this plan might be the saving grace for millions of Americans unable to keep up with their high monthly mortgage payments.
The government-owned mortgage bond corporation Ginnie Mae announced earlier this year the new 40-year mortgage option. The option will be available to homeowners with 30-year mortgage terms. According to Ginnie, Mae would be offered by one of the government agencies backed by the government-owned mortgage bond corporation.
How does the 40-year mortgage option work?
The Ginnie Mae 40-year mortgage option is a loan extension program, similar to the Hope program of the financial crisis of 2008, that seeks to help people facing financial hardships. To avoid losing their homes in foreclosure, it intends to make mortgage payments more manageable for families whose incomes were hit hard during the pandemic.
“As interest rates rise, this 40-year feature will enable more payment reduction options to help homeowners,” Alanna McCargo said after Ginnie Mae’s announcement. “Ginnie Mae has been integral to the interagency actions to prevent foreclosure for homeowners experiencing financial hardship as a result of the [the COVID-19 pandemic].”
Under this new option, you get to choose the payment option for the first ten years. After the ten years have lapsed, it is assumed that you are back on your feet, and your loan will revert back to the standard 30-year mortgage term.
This means your monthly mortgage payments will go towards reducing your loan principal. However, with this third option, your payments in the years after year eleven will be considerably higher.
In addition to this, investors will also be able to purchase securities backed by modified 40-year loans.
“We think the market will find value in securities backed by these loans, so we wanted to provide a pooling structure that would enable issuers to capture that value-thereby enhancing their ability to provide the strongest possible options to the homeowners while remaining respectful of investors’ capital,” John Getchis, Ginnie Mae’s senior vice president for capital markets.
The U.S. Department of Agriculture insures the loans backed by Ginnie Mae, the Department of Housing and Urban Development (USDA), Federal Housing Administration) FHA and the Department of Veteran Affairs (V.A.) make them an excellent addition to an investor’s portfolio.
Who is eligible for the 40-year mortgage option?
Though many families faced financial hardships during the pandemic, only a fraction of those in forbearance will be eligible for the Ginnie Mae 40-year loan term. For you to qualify, your loan must be in default or near default. Your original mortgage term must be longer than 361 months (30 years) and less than or equal to 480 months (40) years—15-year mortgages can, therefore, not be extended under this program. Finally, your loan must have an FHA, VA, USDA, or PIH loan.
Families struggling with mortgage payments should explore loan modification options.
Is the 40-year mortgage option for you?
As with anything involving money, you must weigh the pros and cons of the 40-year mortgage option. With the 40-year mortgage, your loan will be stretched over a long period, resulting in lower monthly payments. When the payments are more manageable, many families will be able to avoid foreclosure.
In addition to this, a more extended payment period translates to more money paid overall—you will pay more interest over the life of your loan. Unfortunately, this loan isn’t available to new borrowers or those with shorter terms and are struggling. The pros do outweigh the cons, but the choice to use this route should be carefully evaluated. In the meantime, borrowers should look out for when the product is officially launched.
About Eric Frazier:
Eric Lawrence Frazier is President and CEO of the Power Is Now Inc. The Power Is Now is a multimedia company specializing in real estate and mortgage education for consumers and real estate professionals on various topics in real estate, lending, economics, and government policy since September 1, 2009. The financial and real estate information is distributed through BlogTalkRadio, iTunes, TuneIn, and other online radio platforms nationwide, as well as online T.V. and eMagazines. Connect with Eric Frazier DRE 01143484 | NMLS 461807 | Office: 800-401-8994 x 703 | Direct: 714-361-2105 and start your real estate investment journey or homeownership in safe hands.
About the Power Is Now Media
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