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

Get out.

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.

The problem is, 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 wipes 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 loan's long term costs more manageable, at least for first-time home buyers who can qualify.

The California Housing Finance Agency (CalHFA) which serves only low- and moderate-income, first-time home buyers who meet income and home price limits is offering a 40-year loan with a fixed rate of 5.75 percent.

"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 home buyer 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.

Let's compare a $300,000 mortgage.

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 6.590.

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 home buyers purchasing a single-family home, condo, planned unit development (PUD) home or qualified manufactured home.

In Santa Clara County (Silicon Valley), for example, 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 same 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.

Also 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, among the agency's other loans, there's a 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.

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

Published: March 22, 2006

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.