40-year mortgage poor solution to lack of affordable housing

Markets behave cruelly, yet predictably. The more a consumer wants something, the higher the price. Housing is no exception. The latest market force to drive housing prices even higher is the 40-year mortgage. Ironically, the idea was to make an unaffordable house somehow affordable.

It doesn't work.

It is no coincidence the recent run-up in housing prices has happened while lending institutions have made it easier to borrow lots more money. In the first half of 2005, 21 percent of all new mortgages required the homeowner to pay only interest on the loan for a certain period. In hot housing markets like the one we're in, these "interest-only" loans have accounted for a higher percentage of all new mortgages.

In recent months, interest-only mortgages have begun to fall out of favor. The 40-year, fixed-rate mortgage is the industry's substitute. Even the state, via the California Housing Finance Agency, plans to offer a 40-year product soon.

The math is ugly. Compared with a 30-year loan of $355,000, the 40-year mortgage lowers the monthly payment by less than 6 percent (from $2,716.69 to $2,562.84). But the 40-year loan increases the interest a consumer would pay by 45 percent, from $370,634 in 30 years to $538,411 in 40years.

Mortgage gimmicks that increase demand won't make housing more affordable. More housing, particularly town homes and condominiums that make more-efficient use of precious land, is an important supply-side solution, particularly in this region.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.