Earlier this month the Federal Housing Administration (FHA) announced that they will be establishing a 40-year financing option to reduce monthly mortgage payments for those who fell behind their payments during the Covid-19 pandemic. This option is not yet its own loan product from the FHA, but a modification to their 30-year standard program. The 40-year option is only available for a limited time and will go into effect May 8th to the end of the month, May 31st. Though said to be temporary, the 40-year financing option is something that the FHA and United States Department of House and Urban Development (HUD) are considering making permanent as well as its own product. Let’s take a deeper look into the FHA’s New 40-year loan option!
Pros and Cons
The additional 10 year extension is successful at its mission of making a borrower’s mortgage payments more manageable. With the 40-year loan option increasing the full term of the loan from 360 months to 480 months, their monthly principle will be significantly decreased.
However, many are criticizing this loan extension option on the basis of the maturation of the loan. With the average age of a first-time home buyer in the United States being 33, the 40-year loan option would then be completed when the average-aged borrower is 73 (the national average for retirement age is 64). Another downside is the remarkable increase in the interest paid. No borrower is happy about paying interest, and this 10 year increase in the loan term opposes their effort to minimize interest paid.
Looking at the overall picture, the 40-year loan option still has a specific purpose: To help reduce the burden of mortgage payments for those financially recovering from the economic impact of the past few years – and it fulfills that purpose. Though not for everyone, the HUD’s press release specifically described, “This new loss mitigation home retention option is designed to help those borrowers who cannot achieve a minimum targeted 25 percent reduction in the Principal and Interest portion of their mortgage payment through FHA’s existing 30-year mortgage modification with a partial claim.”
Let’s Look at an Example
At the very end of 2022, the average price of a home sold was $535,800. Calculating the difference between the 30-year and 40-year mortgage loan options, the homeowner/borrower would save about $400 a month in principle, but spend an extra $200 in interest, overall saving them $200 a month (or $2400 a year) after they switch to the 40-year loan option.
Wrapping it up!
For now, the FHA’s new 40-year loan modification option will only be available for a short time, with many calling for its permanent option to become available. If used in the correct application, this loan option can be a successful implication from the FHA and HUD. To discuss your loan scenario or explore the FHA options, contact CambridgeHomeLoan.com and speak with an expert loan officer!
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