40 Years Is a Bad Way to Spell Relief

Quick -- what do you know about Countrywide Financial (NYSE: CFC)? You probably know that it's been hit hard by the subprime lending crisis, with its stock down some 75% over the past year. You might also know that its credit rating was recently downgraded. My colleague Tim Beyers noted, "Moody's says the bank has burned through $10 billion in cash since August. If that's true, Countrywide is staving off a bankruptcy filing mostly by the grace of multiple capital infusions."

Well, over at Michelle Leder's site, footnoted.org, I read of a new push by Countrywide. Leder's husband received a letter from the company offering a "lower, more affordable monthly mortgage payment than traditional 15 or 30 year loans." What exciting offering is this? Nothing less than a 40-year mortgage. Leder saw this gambit as Countrywide "trying to hook more people on crack."

Countrywide isn't alone. Fannie Mae (NYSE: FNM) started buying 40-year mortgages from credit unions in 2003, and Freddie Mac (NYSE: FRE) has also started offering 40-year loans. Among banks, Washington Mutual (NYSE: WM), Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC) have 40-year mortgage products available.

I suppose that to some people this deal might look good, if it could keep them from losing their houses. It would, for example, be a way to refinance an adjustable-rate mortgage (ARM) that's about to reset a much higher interest rate into a fixed loan. But don't consider it without a lot of due diligence. Note that:

• The savings aren't always great, partly because interest rates on 40-year loans are higher than what you'd get for a 30-year fixed mortgage. If you end up saving $50 or $100 per month, it might well be worth it to scrape that money together elsewhere.
• Those extra years mean you'll pay a lot more in interest. A lot. You'll build equity very slowly -- which will hurt if you turn around and sell the house within a few years.
• If you're planning to sell within a few years anyway, you might be better off opting for a new ARM, one that offers a fixed rate for perhaps five years before starting with adjustments. Such a loan could help you build equity faster and might offer lower payments.

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If you're interested in home-buying and selling, visit our Home Center. You might also want to check out these articles:

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