Last year, the Federal Housing Authority started to talk about 40-year mortgages, and lenders and mortgage brokers have been gauging borrower interest ever since while feeling out the legal and ethical complexities.
I wonder if the additional interest paid over the life of the loan is the right metric to evaluate whether these 40y loans make sense?
A user cost model would suggest that, as long as the interest rate over the life of the loan is sufficiently low (and over 40 years there’d probably be many chances to refi), and making some modest assumptions about housing appreciation v rental price growth, maybe going from a 30y to a 40y mortgage wouldn’t chance the typical result: buying is often preferable to renting?
Thanks for the comment, Aziz. That is a good insight, especially about the chance to refinance somewhere along the way. Home mortgages never really have any prepayment penalties, so if you can bite the bullet and hold on for a few years, most people (assuming continued creditworthiness) will have the chance to refi. And good point about rent vs. equity/home ownership over the course of a lifetime.
This is great, Ben.
I wonder if the additional interest paid over the life of the loan is the right metric to evaluate whether these 40y loans make sense?
A user cost model would suggest that, as long as the interest rate over the life of the loan is sufficiently low (and over 40 years there’d probably be many chances to refi), and making some modest assumptions about housing appreciation v rental price growth, maybe going from a 30y to a 40y mortgage wouldn’t chance the typical result: buying is often preferable to renting?
Thanks for the comment, Aziz. That is a good insight, especially about the chance to refinance somewhere along the way. Home mortgages never really have any prepayment penalties, so if you can bite the bullet and hold on for a few years, most people (assuming continued creditworthiness) will have the chance to refi. And good point about rent vs. equity/home ownership over the course of a lifetime.
Thanks for the reply, Ben. Love your work—looking forward to future editions!