By Ray Birch
FRESNO, Calif.—As rising home prices and ongoing high interest rates continue to push the American Dream of owning a home further away from many younger would-be buyers, Noble Credit Union has introduced a 40-year mortgage that has quickly attracted borrower interest.
As CUToday.info reported, $1.27-billion NCU has launched a 40-year mortgage product it said is designed to offer a more affordable and accessible alternative to traditional 30-year mortgages. The new mortgage product features lower rates, providing borrowers with the opportunity to save more over the life of the loan, according to Noble Credit Union.
As CUToday.info also reported, one analyst has weighed in with his views on what a 40-year term could mean.
“Purchasing a home has become more difficult in recent years in the California Central Valley as the prices of homes have steadily increased,” said President and CEO Gino Cayanan. “In fact, the average home prices have increased in Fresno County from $290,000 in April 2020 to $421,940 in April 2024.”
Cayanan emphasized that represents a whopping 45% increase in only four years.
‘Great Opportunity’
“In addition, the availability of homes has been limited and interest rates have risen nearly (four percentage points) over the last few years,” he said. “We are finding that our members are more challenged in being able to afford a home. When seeking alternatives to help our members obtain the American dream of home ownership, we created this loan option. We believe it could be a great opportunity for our members, as it offers a lower interest rate than a conventional 30-year mortgage and more affordable monthly payments.”
Just how much will the new loan terms lower monthly payments for many members?
“The amount varies based on the rate at the time and the loan amount, which are both locked,” said Cayanan. “However, on a $400,000 loan, the savings on principal and interest payments could be almost $5,000 per year, comparing it to a 30-year fixed conventional loan (using the CU’s June loan priciing). A product like the 40-year mortgage is putting home affordability in reach for more of our members.”
Priced Like 10-Year Product
Gino Cayanan
The loan is priced as a 10-year fixed rate mortgage as opposed to a 30-year fixed rate mortgage, Cayanan said.
“Ten-year pricing is generally more favorable,” he said. “For example, the best rate as of June 28 for a 10-year mortgage is 5.875%. The 30-year mortgage best rate is 6.625%. The loans are being processed and underwritten to agency conventional, conforming guidelines.”
To address risk, the product includes a 10-year call feature, which allows the loan to be priced at a lower interest rate than a 30-year mortgage, the CEO said.
“The interest rate for the loan is fixed for the first 10 years,” Cayanan said. “The homebuyer has their choice of paying their remaining balance at the end of the 10-year call or refinancing the loan. In fact, they can refinance their loan into another type of loan at any point in the first 10 years to take advantage of potentially lower interest rates with no prepayment penalties.”
A Preference over ARMs
Cayanan added the fixed-rate call feature may be preferred to an adjustable-rate mortgage for some borrowers.
“While the longer amortization period could translate into more interest being paid over the life of the loan, the lower rate, coupled with the loan payments that are amortized over 40 years, can offer lower monthly payments, possibly making the difference in someone’s ability to afford a home,” he said, noting again the payment difference depends on several criteria, including the price of the house, the loan amount, and credit history.
By offering the new product, in addition to the CU’s other conventional and adjustable-rate mortgage loans—FHA, VA and reverse mortgage loans—Cayanan said Noble Credit Union is giving members the choice to select the loan option that works best for their individual needs, regardless of their age or experience as a homeowner.
Grants Available
“With inflation, increased home prices, and increased mortgage rates, we are continuously looking for opportunities to help our members, this product is just one example,” Cayanan said. “For the past two years we have also jumped on the opportunity to participate in the FHLBank San Fransisco Middle-Income Downpayment Assistance Program that provides a grant up to $50,000 in downpayment assistance. Last year one of our members was the recipient of this grant, a program that does not require the member to repay the assistance received. This is something we are very proud of.”
Noble introduced the 40-year loan late in the fourth quarter of 2023, and as of the first week of July had yet to close a loan, but had more than $15 million in pending 40-year loan applications.
“This is a very healthy and exciting start to the program and a good indication that our members were seeking alternate options,” Cayanan said. “Too, member feedback has been very positive. We have been told by many that they appreciate their credit union is looking at options to assist them with being able to purchase a home.”
Alone in the Market
According to Cayanan, Noble is the only local institution offering a 40-year mortgage.
“We understand that the financial status and financial resources vary greatly among our members, but we believe in the pride of home ownership,” he said.
Cayanan does not believe mortgage loan terms will follow the trend set on auto loans, on which the ters have gotten lower and lower as consumers seek out lower monthly payments.
“At least not in the immediate future,” he said. “That would require some regulatory changes. The Federal Credit Union Act and NCUA’s general lending regulation permit FCUs to make long-term residential real estate loans with maturities of up to 40 years on one-to-four-family dwellings.”
Projections for Programs
Noble is projecting the program will add $30 million to its total mortgage portfolio of approximately $166 million.
“It will be monitored and evaluated for future potential as the program moves forward,” Cayanan explained. “While a 40-Year Mortgage may be a new concept for some, it offers distinct advantages for those looking to purchase their first home. It provides a stable mortgage solution that aligns with the financial needs of first-time homebuyers, allowing them to invest in their future and start building generational wealth."