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Business

Most buyers should reject 40-year loans

January 18, 2008

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Buying a house with a 40-year mortgage is usually a bad idea, but such loans can be a viable option for current owners who are behind on their bills and are facing foreclosure.

Q: I want to buy my first house but keep my payments as low as possible, because a lot of my income already goes toward making the minimum payments on my credit cards and auto loan. The mortgage broker that I am working with suggests that I take out a 40-year loan instead of a typical 30-year loan, because stretching the payments out over an extra 10 years will lower my monthly housing expenses. This sounds like a good idea to me, but what do you think of this plan?

A: I think that it's a bad idea, especially for someone who's in your kind of financial situation.

As I've written before, I'm not a big fan of 40-year mortgages, because the slightly lower payments that a borrower would have to make by stretching them out over an extra 10 years would easily be wiped out by the additional interest charges that would have to be paid over the same time frame.

For example, choosing a 40-year payback schedule instead of a 30-year plan for a $250,000 loan would lower the monthly payments by about $25 - but cost an extra $177,000 in finance charges for the "privilege" of paying the money back over the additional decade. It doesn't take a rocket scientist to know that paying $177,000 just to lower the monthly payments by a mere $25 is a lousy proposition.

Frankly, a person who's in your type of financial situation probably shouldn't even be thinking of buying a home at all. The fact that much of your income already is being used just to make the minimum payments on your credit cards and car loan suggests that you need less debt, rather than more: With many credit-card companies still charging 18 percent (or higher) annual rates, it would be better to postpone your home-buying plans and instead use every extra dollar that you have to pay off those high-rate cards first.

My advice might be different if you already owned a home and were falling behind on your bills, and your only choice was to refinance with a 40-year mortgage or risk losing the home to foreclosure. You're not in that situation now because you don't own a home, but I'm afraid that you'd soon find yourself in such a pickle if you purchase a house without first getting your current debt under control.

Q: I have purchased a house that I plan to fix up and then rent to tenants. This is my first venture into the landlording business. I have purchased some preprinted lease agreements from the local landlords association, but they include a paragraph that would allow the tenant a five-day grace period to pay their rent. Is such a grace period required by law, or can I cross the paragraph out and demand that my future tenant pay the rent on the day that it's actually due?

A: It's common for landlords to provide a five-day grace period for rental payments, but few local or state governments legally require it.

Call the landlord group that sold you the forms and ask if the five-day period is mandatory in your particular area. If it's not, simply cross out the provision in the rental contract and then make sure that both you and your future tenant initial the change.

Q: I was out of work for most of last year, so I had to tap a large part of my savings to pay my monthly mortgage, property-tax assessments and other bills. I recently did some rough calculations, and it looks like I will be entitled to about a $3,000 income-tax refund because my deductible expenses were nearly twice the amount I earned. If I am owed a refund, will I still have to pay a penalty to the Internal Revenue Service if I don't file my return by April 15?

A: No. Penalties and interest usually are assessed only on people who owe money to the IRS but don't file a return by April 15. No such fees are charged to Americans who are entitled to a refund and file late, because they essentially provide the government with an interest-free loan until they get around to mailing in their return and the IRS cuts a check.

Comments

toefungus 7 years, 3 months ago

Very dumb idea. Just like most of the ideas on mortgages in the last 10 years.

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