Homeowners consider 40-year mortgages amid rising housing costs

Yahoo Finance's Ronda Lee joins the Live show to discuss how 40-year mortgage loans could lead to housing affordability.

Video transcript

BRIAN CHEUNG: Rising mortgage rates have complicated the housing markets for first-time homebuyers, among others. The challenges raising questions over the cost and benefits of a 40-year mortgage. That's right, 40. For more on this, let's bring in Yahoo Finance's Ronda Lee. Ronda, this is an innovation that exists already in the United Kingdom. Here, in the United States, not as common of a thing. Tell us a little bit more about why in this environment, it's kind of part of the conversation.

RONDA LEE: So here in the US, 40-year loan modifications have been used for loss mitigation. So we've seen it back during the housing crisis in 2008 for people, to keep them in their homes, that's what they did. The servicers was like, OK, let's reconfigure your loan to 40 years so you don't have to leave the house. That's something that was also offered to homeowners due to COVID-19 that had FHA loans. So FHA is considering extending this program. And then someone came up with the idea of, like, we have a housing affordability problem. How about a 40-year mortgage?

BRIAN CHEUNG: So I guess the natural question, though, is, I mean, is this really a solution? Because you're just extending the amount of time that you're paying these interest rates back. And especially now, those rates are going to be higher. So first of all, is this a fixed product? Is this an adjustable product? And secondly, does this actually have the impact of making it more affordable, if you're just dragging out the payments over time?

RONDA LEE: Well, it's kind of like the same thing of people who have 84-month payments on a car note. It gets you in. You get the car. And so you're in the house. The problem is that if you're trying to build equity, the whole purpose of home ownership is to build wealth and to pass that down. Your equity is going to be taking longer to build it. So that's the bigger problem. The other problem is, if you give this person a 40-year mortgage and they have a financial hardship later down the line, what options do you have for them?

BRIAN CHEUNG: Right, well, I was going to say, I mean, because the longer duration also means that there's perhaps higher credit risk that's associated with that. So is there any data about the default rate among these types of products that we've seen from the UK and how viable that would be in this particular housing market?

RONDA LEE: No data, which is why. So right now, the FHA is looking for comments for extending the loan modification program beyond COVID-19. So that's where the industry-- the real estate industry is like, well, we have this housing thing. What about 40-year? So right now, people are-- the big thing is, yes, it will help you get in. Like, you can get 84 months on a car to get in, but you're going to be paying $800 on a Kia, you know?

BRIAN CHEUNG: Yeah.

RONDA LEE: And it's a thing. And so by the time you've paid it off, there's little value left for the car. A home is different than a car. But it's that thing. If you want the equity, that's where the tough problem is, where do they have the equity?

BRIAN CHEUNG: And especially, I mean, do you find that this would even be attractive in this environment? Because what we're seeing is the mortgage rates are going up. But because of the supply of homes and the demand still remaining robust, people are still paying out the wazoo for a starter home, even autos. People are paying a lot for a Kia right now.

RONDA LEE: However, rents have gone up exponentially. And they will continue to go up. So at least, if I have a home, then I'm gaining. Even if the equity is a little bit slower, guess what? My mortgage rate, my monthly mortgage payment is going to stay the same. My rent can go up 40% if I'm in New York.

So I would, even though I know the downsides, because my biggest concern right now is my rent is going to be renewed and I'm going to have another 40% increase. 40% increase in rent, monthly mortgage payment? I'm going to go with the mortgage payment.

BRIAN CHEUNG: Mm, yeah. Kind of balancing out things there. Yeah, well, especially in New York, where everyone--

RONDA LEE: And even around the world. Around the US.

BRIAN CHEUNG: All right, Ronda Lee, Yahoo Finance. Thanks so much for the breakdown. Appreciate it.

RONDA LEE: Thank you.

BRIAN CHEUNG: All right, switching gears--