My wife and I are in the middle of the home-buying process (offer out, waiting a response). We are both young (24 and 29). We've lined up a 40yr adjustable-rate with a 10yr interest-only option (actually, an 80% first mortgage with a higher interest 20% 2nd). This type of mortgage would seem to offer even greater concern to the opponents of a 40yr fixed, and for the same reasons.

As an aside, in our particular situation we will *not* be taking on too much debt, and offer very *little* risk to lenders.

So the basic argument against this is that people with bad credit shouldnt be tempted to do something smart with their money because they probably wont be able to keep making good decisions? If the assumption is careless people will keep making careless decisions, whats the difference how they piss their money away? Shouldnt they be encouraged to at least take a wise chance?
As far as the length of the loan, pointless argument. Re-fi, my friends. Re-fi.

I have trouble seeing the difference between a 40 year mortgage for the elderly and a reverse mortgage, which is supposedly ideal for the elderly. Why is one bad and the other good?

And in the "I have trouble" category, how can the long-term increase of housing prices exceed income increases and still be reverting to fundamentals? Feels bubbly to me.

The fundamental problem with the criticism of the widespread use of the 40-year mortgage is that people are not smart enough to spend their own money properly. Sure, some people will get into way too much debt, just like they do now. The 40-year would give a lot more people a shot at home ownership, and I don't anyone who would argue with the social and economic benefits of that.

Plus, if I had a 40-year note, I could totally afford another gasoline-powered turtleneck sweater.

(come on, there aren't enough Steve Martin references in this world.)

Could someone explains what happens to the mortgage when the parties involved die? Does the bank foreclose? Do the children have the option of taking over the loan? Is the debt passed on to heirs, regardless of whether they want the debt?

*I mean the assumption that people aren't smart enough is erroneous.

blahblahblah

At one time 30 year mortgages were rare. With the 30yr becoming common the world did not end. Most people don't care if the mortgate gets paid off as long as they get a tax break and the house grows in value. I've never paid off a house but have made gains in the equity value of every home I've "owned." When all is said and done people move to a less expensive housing market upon retireing and buy their final residence with the profits from homes they never "owned."

Re: Clark's question. Each state has different laws regarding inheritence but usually who ever gets the property gets the mortgage and the equity value. You can sell it and pay off the mortgate and keep the difference. Remortgage it in your name or if it is worthless (more owed then it is worth) refuse the inheritence and let the owner of the mortgate deal with it. They will have a claim against the estate. Anyway it is a question for an attorney in your particular state to answer my view is just a laymans.

You will pay until you die is bad? Didn't Japan's financial markets allow for 100-year mortgages - on the premise that the kids will own the house and continue to pay. OK, I'm treading into Ricardian Equivalence territory a bit, but how does this increase the demand for housing. Of course the sheer stupidity of what Dan rightfully criticizes is echoed by those who think the cost of the Iraq War includes only what cash has been laid out so far (see pandagon on how his car cost only $622).

pgl,
It increases the demand for resident-owned housing because it brings down the monthly outlay required to purchase a house. This means a)more people are able to afford house payments instead of cheap rent (especially subsidized rent) and b)more people are credit-worthy for purchasing a house because the bank is forced to consider their monthly debt-income ratio differently. It's a simple extension of the premise that 30-year mortgages make houses more affordable than 15 or 20-year notes. People are leveraging their ability to make money over a longer period of time.
Of course, the real test for this is whether banks and other lenders are willing to assume that extra risk. They are, after all, laying out the same money to purchase the house, but they're getting it back at a slower rate. In the long term, though, they've made more money in interest.

First, I would like to see these kind of amortization tables apply to commercial real estate loans. If our investment properties could be carried with a 40 yr note, it would improve cash flows significantly. As to the issue of who pays the loan when you die, by definition, someone obtaining this loan will almost certainly be compelled to have a mortgage insurance policy with the note holder as beneficiary. Froggy

Even 30-year mortgages aren't expected to be paid off - the average family moves once every 3 to 5 years.

I once thought that a 100-year mortgage would give really small payments. It turns out that (as usual) the math is against you. As the term goes out and out, the payments get closer and closer to the interest-only amount, never smaller.

Even an interest-only mortgage is a bit strange. You buy a $200,000 house, pay on it or 20 years, after which you owe $200,000.

If you expect the value to go up, and you expect to sell it at that higher value, obviously, that's a good deal.

This is outstanding! Why anyone would want to tie their cash up in a house is beyond me. It will appreciate at whatever rate it will appreciate at, regardless of how much equity you have. A mortgage is the cheapest cash you can find--get the longest possible mortgage for the largest possible amount.

Amusingly, I was thinking as I read this "boy, a 40-year interest-only mortgage would be ideal," then see that's exactly what wjc3 has lined up...("interest-only" mortages are generally interest-only for some period of time--3, 5, 10 years--and then higher payments kick in to amortize the principle by the end of the loan).

Run-up in housing prices? Wherefore are the housing prices up? I'm buying right this very minute in Austin, TX... where the value of a $200K house bought 2 years ago is now $180K. I'm only spending $125 for 2200 sq.ft., 3 blocks from a new elementary school. Granted, it's a foreclosure so that depresses the price a bit, but still.

High housing prices? Move to Texas, folks! The weather is better, and the people are nicer too.

(not to mention more people moving in will drive up the value of my new purchase... ;) )

In a world that offers 72-month car payment options, I don't think this is out of line.

A 40 year mortgage doesn't mean that the mortgage will be outstanding for 40 years. Implicit in mortgages is a 'free' pre-payment option that allows a mortgage owner to pay down principal beyond the monthly minimum. Since the average prepayment period of mortgages is not anywere near the term period the only thing a 40 year mortgage will do is reduce the monthly payment. The monthly payment affordability is a function of current income. Future income growth tends to allow for an increasing rate of prepayment.

Yes this will increase housing prices in the near term as demand for housing stock may increase faster than new housing stock can be built but this will only result in a secular increase in housing prices if some other factor limits housing stock growth such as the limitations of available land in already built up urban areas.

either the borrowers can pay the mortgage or they can't. even in this booming market there have been very high foreclosure rates. putting people in houses that they can't afford, even at the most favorable terms, is not doing anybody a favor. the only reason lenders can make these loasn is they know fannie mae will buy them.

'the basic argument against this is that people with bad credit shouldnt be tempted to do something smart with their money because they probably wont be able to keep making good decisions'

No, the basic argument is that people who buy houses (glass or otherwise) should watch out for stones. 40 year mortgages represent a significant bet for consumers. If the housing market goes down (and even if it doesn't go down nationally, it could go down in different markets). If interest rates go up (and its hard to see them going down too much more), making refi harder. And so on

Now if people bankrupt themselves buying houses too expensive for themselves, thats their own headache in general. But the question is whether it points to an overheated market. I think it does.

Presumably the 40-year loan carries a higher rate than one of 30 years. As others have mentioned, even 30-year mortgages very seldom run to maturity. I think the average life is about 8-10 years.

So what we're seeing is higher rate and slower amortization being made available to people whose credit is not strong enough to justify the lower rate. Assuming the rate difference itself is not unreasonable, and that there are sensible down payment requirements, I see nothing particularly wrong with this.

The argument that "you pay until you die" from Ms. Tyagi is especially silly. If you rent you also pay until you die.

As a point of clarification about interest-only notes, one can typically pay down the mortgage even during an interest-only period. My wife and I will be doing this very thing. The interest-only bit gives us some breathing room in the event we suffer a financial setback sometime in the next decade.

Ashby - you may be right if households face borrowing constraints or if the Barro-Ricardian types are wrong about intergenerational bequests. But then you just made the case that the Bush tax cuts reduced national savings. Wait, they DID reduce national savings? Dr. Barro?