In just a year the 40-year mortgage has become the most popular consumer loan product offered by a seven-branch thrift in Hingham, Mass.
"We're doing on average $3 million a month, which for a small bank like ours is tremendous," said Michael J. Sinclair, the executive vice president for retail lending at Hingham Institution for Savings, last week. "It's been more successful than I could have possibly imagined."
Though they are still rare, interest in 40-year mortgages is on the upswing throughout the country, not just in suburban Boston, where the $562 million-asset Hingham does business. On May 11, for instance, Washtenaw Mortgage Co. in Ann Arbor, Mich., said it would begin offering 40-year-mortgages; Ameritrust Mortgage Co. in Charlotte made a similar announcement two weeks earlier.
The trend, moreover, can be expected to accelerate, spurred by Fannie Mae's decision to begin buying fixed-rate and floating 40-year loans on a regular basis on June 1. The secondary market specialist has been conducting a 40-year-mortgage pilot program with 22 credit unions since fall 2003.
"We didn't see a massive volume, but that's because interest rates were pretty low" throughout most of the pilot program's run, Fannie spokeswoman Sandy Cutts said Friday.
In the past few months, though, a combination of rising rates and rapidly increasing valuations has threatened to drive some homebuyers out of the market, she said.
"We don't foresee this replacing the 30-year fixed-rate mortgage, but for some buyers a longer-term loan could make the difference between being able to afford a home or not," she said.
David Elliott, the assistant vice president for secondary market sales at $617 million-asset Northwestern Bank in Traverse City, Mich., said Friday that Fannie Mae's announcement is likely to spark a surge of interest in 40-year mortgages among banks.
"I think you'll begin to see many more banks start offering them," he said.
Forty-year mortgages have been around since the late 1980s, but only a handful of lenders have offered them - mainly, Mr. Elliott said, because banks had nowhere to sell them.
Northwestern began offering a 40-year mortgage product about five months ago. Its success has not been as marked as Hingham's, but Mr. Elliott said customers have shown "a fair amount of interest. He said he expects demand to pick up as interest rates - and monthly mortgage payments - continue to climb.
The appeal is obvious. Though borrowers pay thousands of dollars more in interest than they would under a conventional 30-year mortgage, their monthly payments are significantly less.
Ms. Cutts said borrowers in Fannie's 40-year-mortgage pilot program paid anywhere from $65 to $100 less per month, while Mr. Sinclair said the average difference between the monthly payment on a 40-year "20/20" mortgage and a 30-year mortgage is about $220.
Hingham introduced its "20/20" mortgage in May 2004 and has since made 115 such loans, worth $38 million. The interest rate is fixed for the first 20 years and floats for the next 20.
"Most of our borrowers really don't think they're going to be there for 20 years, so their monthly cash flow is more important" than the mortgage's overall cost," he said.
Lower- and middle-income borrowers stretching to afford a home are not the only people who have shown interest in Hingham's "20/20" mortgage, Mr. Sinclair said. More affluent buyers looking for so-called "jumbo" mortgages have also used them, as have families buying second homes, he said.
"It seems to have something that appeals to every class," he said. Ms. Cutts was careful to point out that the 40-year mortgage does have a considerable downside. It carries a higher rate - typically about 25 basis points higher - and keeps borrowers in debt longer than the 30-year mortgage does. "It's not going to be right for everyone," she said.
Currently, Mr. Sinclair said, none of the other banks in Hingham's market area offers a 40-year mortgage, though he expects that to change soon.
"We've been hearing rumors" about competing products "for a couple of months," he said. "It's been good to be the first, but we're ready to stand up to the competition."
