It is always surprising when bad ideas get so embraced – until you figure out who benefits the most. A 40 year mortgage is like that.
When you consider that a 40 year mortgage really just takes all the bad things about a 30 year mortgage and makes them worse, it is hard to understand why anyone would want to do that to someone is already in financial difficulty. However, the good folks over at the FHA seem to think it is a grand idea!
Follow The Money
As tends to be true in most cases, when you figure out who benefits most from the idea of a 40 year mortgage the more clear it becomes as to why some are so happy about the idea.
A policy like this will only fuel buyers to consider that when buying a home. If they know that have that as an out, they may be more willing to take a financial risk initially and then plan to later try and move over to a 40 year mortgage.
Another effect of this policy – particularly if it is just a first step toward making the 40 year mortgage open to all borrowers – would be an increase in prices. If you increase what borrowers can initially afford, they will inevitably be willing to bid higher. This always pushes up prices.
Finally, the math of a 40 year mortgage just does not make any kind of sense. You end up paying for your home more than twice. At the same time, the amount you save monthly is minor by comparison to the cost.