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California 40-year rate lower than 30-year rate

By Broderick Perkins

A 40-year, fixed-rate mortgage with an interest rate lower than that of a 30-year mortgage?

Now you're talking.

Ever-higher home prices in the past year have given a boost to 40-year mortgages. The longer term makes for lower monthly payments, and that means more buyers can qualify for and afford more expensive homes--at least on a month-to-month basis.

However, the interest rate for a 40-year loan is typically a tad higher than the rate on the 30-year loan. Combine that higher rate with 10 more years to pile on interest, and the financing costs over the life of the 40-year loan virtually wipe out the month-to-month savings.

While some borrowers ignore the long-term costs just to get into a home using a 40-year loan, that long-term cost causes most borrowers to stick with loans with less long-term sticker shock.

In California--a market ripe for mortgages with more leverage--a new 40-year mortgage program is helping make the 40-year loan's long-term costs more manageable, at least for first-time homebuyers who can qualify.

The California Housing Finance Agency, which serves only low- and moderate-income first-time homebuyers who meet income and home price limits, is offering a 40-year loan with a fixed rate of 5.75 percent--more than half a percentage point less than the interest rate for market-rate 30-year loans.

"Compared to the 30-year fixed mortgage, the 40-year fixed mortgage offers monthly loan payments that would be less than a 30-year mortgage on the same house," said Theresa Parker, CalHFA's executive director.

"Each first-time homebuyer comes to us with unique financial situations. The 40-year fixed mortgage gives them one more option to consider as they try to determine the best way to finance their first home," she added.

Compare a $300,000 mortgage with a 30-year term, 40-year term with market rates and 40-year term with CalHFA rates.

As of March 17, Freddie Mac's Weekly Mortgage Survey of market rates put the average fixed rate for 30-year conforming loans at 6.34 percent. Forty-year loans typically cost at least 0.25 percent more than 30-year loans--on the conservative side--putting the 40-year rate at about 6.59 percent.

Using these fixed rates and Nolo.com's loan calculator, a $300,000 30-year loan costs about $1,864 in principal and interest each month and, over the life of the loan, $371,307 in total interest, for a combined principal and interest payback total cost of $671,307.

The typical fixed-rate, 40-year $300,000 mortgage costs about $1,775 each month, $552,308 in total interest and a total payback of $852,308 over the life of the loan.

The CalHFA 40-year mortgage costs $1,598 each month, $467,362 in total interest and $767,362 in total payback costs over the life of the loan.

The CalHFA 40 is only for income- and credit-qualified first-time homebuyers purchasing a single-family home, condo, planned-unit development home or qualified manufactured home.

In Santa Clara County, income limits range from $73,301 to $140,493 (based on number of people in the household) for resale homes and from $85,518 to $140,493 for new homes.

Home price limits for the county range from $627,591 to $767,055 for resale homes and $630,435 to $770,531 for new homes--in both cases, depending upon the home's location within the county.

The loans are available only through CalHFA-approved lenders, including Bank of America, American Home Mortgage, First Mortgage Corporation and more than a dozen more regional mortgage lenders throughout the state.

For those who qualify, the agency's other loans include an interest-only, fixed-rate 35-year mortgage at 5.85 percent; special 30-year loans with rates as low as 3 percent and up to 5.625 percent; and a host of down payment assistance and other loan programs that can be coupled with the fixed-rate loans, including the new 40-year mortgage.

"While the 40-year mortgage may not be right for everyone, it does offer first-time homebuyers another way to help achieve their goal of home ownership," Parker said.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.