Did you know that the 30-year mortgage was authorized by Congress in 1948 for new construction homes. Six years later, they allowed existing homes. They haven't changed the term for 68 years!
Now think about car loans. Due to rising prices of cars, lenders have continuously extended the term on car loans to try to make the monthly payments affordable. They went from 2 year terms, to 3. In the 1980's, they stretched to 4, then five and then six year terms. I was shocked to learn some automobile loans are now based on 8 year terms! Automobiles are a depreciating asset and yet banks and financial institutions have extended the term on them to help keep them "affordable".
Now, let's get back to real estate. In Boise, Idaho (one of the hottest real estate markets in the nation), the current median price of a home in February 2022 was $549,900. That is a 21.6% increase over that time last year. That also means that the median price is now over the $515,200 maximum FHA Loan amount removing that entire financing option. FHA will update that amount like they do every year so that is a temporary glitch.
What is the impact on payments based on this increase? The median price last year would have been $431,121 and the mortgage interest rate was roughly 3%. So at 3.5% down on an FHA loan, that would make the Principle & Interest (P&I) payment of $1,754.01. That doesn't include mortgage insurance, taxes or insurance. Then, only adjusting for the price difference, the P&I jumps to $2,237.26. That is effectively $483.25 more than this time last year for the median priced home.
But wait, there's more. Mortgage interest rates have escalated nearly 2% since then too. According to BankRate.com, today's average 30 year mortgage rate is 4.88%. Updating the calculations for that interest over the original 3%, the P&I jumps again to $2,809.87. Therefore, the net jump in payments would be $1,055.86 a month! Meanwhile, the average wage has only gone up $366 a month here in Idaho.
So is it time for a 40 year mortgage? Let's use the same current housing statistics for Boise, Idaho: Median priced home $549,900 and 4.88% 30 year P&I at 3.5% down would be $2,809.87. The first change will be to raise the FHA maximum loan limit in Idaho to accommodate the increasing home prices. Then, factoring a 40 year mortgage, that home's P&I would drop back down to $2,516.76.
I realize that people like Dave Ramsey would cringe at the thought of a 40 year mortgage, but keep in mind the average the average tenure in a home is about 8 years according to the National Association of Realtors 2021 Profile of Buyers and Sellers. Prior to 2008, it used to be about 5-7 years, then increased to about 13 years and is trending back down again. According to this article: https://www.iseecars.com/how-long-people-keep-cars-study the average American keeps a new car for 8.4 years. That is longer than we are keeping our homes.
Therefore, when (not if) they roll out an FHA 40 year mortgage, you will be able to benefit from lower mortgage payments. Admittingly; however, the principle balance owed would be $33,906.26 more at the end of 8 years. If you can afford a shorter term, do it.
My bet is that the Consumer Financial Protection Bureau will revise their criteria for a Qualified Mortgage to include 40 year mortgages. That will pave the way for the mortgage industry will take a lesson from the automotive industry and extend the mortgage term to 40 years in the near future.
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