Yes, 40-year mortgages are real, but is it right for you?

As inflation hit record highs, many Rancho Cucamonga, CA residents are finding their income coming up short of their needs. What previously paid the bills and allowed for dinner and a movie, or the occasional weekend getaway may not even cover the mortgage, groceries and utilities. Add in financial complications from the Covid pandemic and unemployment, and it may look like you are heading toward foreclosure.

If you’ve missed one or more mortgage payments, you may be able to refinance your current loan or secure a loan modification. A 40-year mortgage can lower your monthly payments, but the consequences may be more than you’re willing to accept.

Standard Mortgage Terms

Generally speaking, homebuyers can choose from 15 or 30-year mortgages. A 15-year mortgage allows borrowers to pay off the mortgage in half the usual time. In addition to significantly higher monthly payments, it can save the homeowner thousands and even tens of thousands of dollars, as the interest rate is often lower than other mortgage loans.

Most California homeowners have a 30-year mortgage, and it’s the most popular option for a reason. It provides more purchasing power. The monthly payment is lower than a 15-year mortgage, which allows them to buy a larger home while staying within budget. Another benefit to a 30-year mortgage is that homeowners can pay it off faster if they want to, without committing to the higher payment of a 15-year term.

Regardless of the term or time left on your current mortgage, if you have or are about to miss one or more payments, acting quickly may help avoid foreclosure.

Missing Mortgage Payments

Most loan servicers have a grace period of up to 15 days. Nothing happens if you pay after the due date but within the grace period, and it’s counted as “on time.” When you miss a payment’s grace period, you may start the ball rolling on the foreclosure process.

The First Missed Payment

Your servicer will likely charge a late fee if they don’t receive your payment before the end of the grace period. Your loan documents will contain the late fee amount. If your payment is 30 days late, it could negatively impact your credit score. Frequently, it causes more damage to borrowers with higher credit scores.

Notice of Default

After 3 missed payments, your lender may record a Notice of Default in San Bernadino County or in whichever county your home is located. You have 90 days from the Notice of Default to bring payments up to date or make other arrangements. Servicers don’t want you to lose your home. As a result, they may contact you for several months demanding payment and listing programs you may qualify for before recording a Notice of default.

Notice of Sale

If you haven’t made other arrangements, a Notice of Sale is typically recorded at least 90 days after the Notice of Default. Your home may be sold at a public auction no less than 21 days later.

40-Year Mortgage Basics

As noted earlier, a 30-year mortgage is the most popular option for Rancho Cucamonga, CA homeowners. It provides balance: The interest rate is not as low as the 15-year mortgage, but the monthly payments are lower. Many lenders, such as the Federal Housing Authority (FHA) and major banks, don’t offer terms longer than 30 years. For buyers who want the smallest payments possible and a larger home, a 40-year mortgage may be preferable. For homeowners with cash flow concerns, it may be the only way to keep their home.

Pros of a 40-Year Mortgage

The primary reason for a 40-year loan is the lower monthly payments. Adding ten years to the mortgage allows you to maximize your housing dollars when buying a new home. However, if you are missing your monthly payments on an existing mortgage, you may qualify for a loan modification. This process restructures your current home loan, potentially changing the interest rate and extending the length, thus lowering payments.

Cons of a 40-Year Mortgage

The tradeoff with the lower mortgage payment is the additional interest you’ll pay. You pay more because of the extension, and the interest rate may be higher than other options. Let’s take a look at the math:

According to MarketWatch, if the interest rate is 4.67% and you put 20% down on a $408,100 home, your monthly principal and interest will be approximately $1,504. While this is $180 lower than the 30-year mortgage, you’ll pay nearly $145,000 in interest in the first ten years of a 40-year mortgage. Over the course of the loan, you may pay more in interest than the purchase price of your home ($408,100).

Here’s the bottom line…

Talk with a Lawyer Near You

Ultimately, you need to make the decision that fits your budget the best. It’s critical that you understand your options as well as the consequences of your choice. Your servicer may work with you on alternatives, but they only considers their loan. When you consult with an attorney, they look at your entire situation. Contact Terrence Fantauzzi at 909-552-1238 to schedule your free, no-obligation appointment today. He can help you assess your overall financial health and offer relief solutions.

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