On Wednesday, the Federal Housing Administration (FHA) announced that 40 year mortgage terms will be permitted beginning in May. Previous to this, mortgages were limited to 30 years.
What the FHA ruling means for consumers
You may wonder how this new ruling will impact consumers, if at all. Well, it’s certainly going to increase the buying power for millions of home buyers immediately. This was most-likely the intention of the current administration, and it will certainly work. You could make the argument that this will allow less-qualified individuals to buy homes, eventually increasing defaults and possibly causing a housing crisis similar to 2008. But, that’s my amateur economist speculation, so nothing to see here.
One notable improvement is that this could help first-time homebuyers break into the very challenging real estate environment that exists today. As we’ve talked about before, owning a home is a great long-term investment and it certainly doesn’t hurt to allow more people this option.
For real estate investors, this is a homerun. Instead of spreading your mortgage expenses over 30 years you can now do it for 40. On a $200k purchase at 5%, this lowers the annual mortgage payment by approximately $1,300, allowing landlords to accumulate rental properties at a faster rate by increasing cash flow. Win-win.
Should you get a 40 year mortgage?
Heck, I don’t know. It depends largely on how responsible you are and I personally haven’t met any of you. What I do know, is that I currently have a 2.125% rate on my primary mortgage. If offered the opportunity to refi this 2.125% rate into a fresh 40 year loan at 2.125%, I would do it in a flash. I would save about $300 per month that could be applied toward stock investments or other real estate purchases. Over 40 years, this $300 per month would grow to $1.876MM. Yeah, I don’t think I need to explain that any further.
In the end, you should examine your own financial situation to see if a 40 year mortgage might benefit you in the long-run. We’ll update you as this situation progresses later this summer.