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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.

Learn more
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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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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Related Tickers

9/18/2014 4:02 PM
BAC $17.04 Up +0.27 +1.61%
Bank of America CAPS Rating: ****
CFC $4.25 Down +0.00 +0.00%
COUNTRYWIDE FINANC… CAPS Rating: No stars
FMCC $3.28 Down -0.07 -2.09%
Freddie Mac CAPS Rating: **
FNMA $3.30 Down -0.12 -3.37%
Fannie Mae CAPS Rating: **
WAMUQ.DL $0.00 Down +0.00 +0.00%
Washington Mutual,… CAPS Rating: No stars
WFC $53.24 Up +0.73 +1.39%
Wells Fargo CAPS Rating: ****

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