Over-inflated home prices are not stopping cash poor consumers from getting the house of their dreams as many mortgage lenders are letting homeowners drag out their mortgages for up to 40 years. By switching from a fixed 30 year to a 40 year mortgage, homeowners can stretch out mortgage payments and qualify for larger homes with lower payments. Home prices in today?s market are ready to decline as demand decreases. The average price of a starter home in the US has climbed up 14% since last summer, while the average income for the has only gone up 4%.
Although 40 year mortgages may seem like good news for homeowners, many experts say the benefits are far outweighed by high interest rates, 10 years of extra mortgage payments, and a reduction in home equity. This (40-year) mortgage screams of a budget constrained people desperate to get into a home. Inflated home value appreciation over the last several years has left some consumers with little choice but to seek riskier loans, like the 40 year mortgage and other interest only loans.
A 40 year mortgage is more attractive than interest only loans because borrowers build equity, even though it is at a sluggish rate. The 40 year mortgage was created in the late 1980s by several S&L associations. Since home prices skyrocketed, there has been an increase in demand for this type of mortgage.