The 40 Year Mortgage Loan Move

You’re ready to buy your first home. Or you’re thinking about moving up to a new residence. It’s time to shop for a mortgage loan. You’ve read about the 40 year mortgage loan. Now you’re wondering if this product is the right one for you.

Like all mortgage products, the 40 year mortgage loan is the perfect loan vehicle for many home buyers. For others, though, it doesn’t make financial sense. Here are some questions to ask yourself to determine in which camp you fit.

How important are the size of your monthly payments? How steady is your monthly income? The main benefit of a 40 year mortgage loan is that it comes with lower monthly payments. Borrowers who take out mortgage loans with 15- and 30-year terms will face higher payments each month. That’s because your home loan is spread out over a longer period of time if you go with a 40 year mortgage loan. That allows lenders to charge you a lower payment each month.

If your monthly income isn’t the steadiest, or if you worry that you’re not yet making enough dollars every 30 days to afford the house of your dreams, a mortgage with a term of 40 years might be the perfect loan vehicle for you. This loan, with its lower monthly payments, will allow you to afford that dream home that you might not otherwise have been able to purchase.

Of course, there are some negatives associated with 40 year mortgages, too. The biggest is that over the course of the loan you’ll end up paying for more than you will if you take out a 30 year mortgage or 15 year mortgage loan. That’s because you’ll be paying far more interest. You might be surprised at how much of every mortgage payment you make is devoted to paying off the interest on your mortgage loan. You’ll be paying far more interest on a loan that’s stretched out over a period of four decades.

You’ll also find that a smaller number of mortgage lenders today are willing to give out 40 year mortgage loans. Mortgage products with 30-year and 15-year terms are the industry standard. These loans are viewed as less risky because mortgage lenders are receiving larger payments each month. This way, they’ll get more money even if borrowers eventually default or foreclosure on their mortgage loans. With a 40 year mortgage, lenders are receiving far smaller payments each month. Therefore, their risk of losing more money should borrowers eventually foreclosure is far higher.

If you do determine that a 40 year mortgage is right for you, be diligent in doing your research. Make sure you study all the loan-origination fees and additional fees that your lender will charge. You don’t want the monthly savings of a mortgage loan with a 40-year term to be eaten away at by origination and processing fees that are too high.

The economy stinks and you just had to take a significant cut in pay or lose your job altogether.  Your boss assures you that as soon as things pick up around the office you will probably go back to your old salary.  If things improve enough he may even give you a raise above that to compensate for what you are sacrificing now.  You are not at all happy with the situation but you grin and bear it.  After all, things are so bad out there you may not get another job quickly.

If that isn’t bad enough you have just found the house of your dreams and it has been reduced for quick sale.  The original asking price was $158,500 but it is now listed at $135,000.  You contact a mortgage broker who runs the figures and even with your savings, after closing costs and her 3 point commission you would still have to finance $121,000.  That does not seem like very much but unfortunately, with your current lower wages, you do not qualify for a 30 year fixed rate mortgage.  You need to find something cheaper, and in those cases, 40 year mortgages tend to come up! So she does some checking and finagling and comes up with one of a few 40 year mortgage lenders.

40 Year Mortgage Rates: Are you for real?

When you first contacted this broker you were looking at a 30 year fixed rate mortgage.  The calculations she provided for you show a loan amount of $121,000 over a 360 month term and carrying a 6.25% interest rate.  The monthly payment would be $745.02 but unfortunately you were unable to qualify for that amount based on your current income, assets and outstanding debt.  With the new calculations she ran after finding a lender who is willing to offer a 40 year mortgage you now qualify, but only just.  Based on a 40 year mortgage calculator, the amount of $121,000 being financed over a 480 month term with a 6.5% interest rate your monthly payments would be $708.40.   Even though it doesn’t seem like a lot, that $36.62 difference in monthly payment made all the difference in the world.

At first it seems like a dream come true, but then you notice the percentage rate is higher and wonder what’s up with that?  The broker explains that a 40 year mortgage is considered a high risk mortgage and most lenders will not finance them.  In order to compensate for the amount of risk they are taking, they raise the percentage rate.  Ok, you understand that but when you get home you compare the two loans.  You notice that the total amount you would have been paying for the 30 year mortgage would have been $268,207.  If you take the 40 year mortgage, and pay it to term, you will be paying $340,032.  That is a HUGE difference!  She is talking about $71,825.  That is over half the asking price of the house.

The Dilemma: Take the 40 Year Mortgage or Wait Until the Market Stabilizes

You understand that the lender will be taking a risk, so 40 year mortgage rates are higher.  You also understand that without the monthly payments being lower you will not qualify.  So what should you do?  You can always wait until the economy bounces back and try again for that 30 year term, or you can take this 40 year mortgage and try to refinance later.  If you’re a gambler, go for it.   If not, remember the old adage, “When in doubt, don’t.”

A Comparison Of 40 Year Mortgage Monthly Payments

Overall, it comes down to whether or not you would like to save money in the long term, or in the short term. If you would like to move into a house that you simply cannot afford at the moment with a 30 year mortgage, then by all means opt for the 40 year mortgage. However, if you are thinking about what will happen in twenty years as a result of the 40 year mortgage, then it may be wise to think long and hard about the elevated interest rates and the slow equity build up. Ultimately the decision will depend upon your discernment as a home buyer/owner , and your ability to be responsible financially. Hopefully this information has helped someone gage the pros and cons of a 40 year mortgage, so that they can make a well thought out decision that will affect their future positively.

This extra 10 year term will help you, as a borrower, by bringing down your monthly installments considerably. Now, you could opt for that dream home that you have been aspiring to buy. Then again, sometimes, it’s also possible that you will have to compromise for a smaller home, even if it’s only temporary, until you are at a more stable financial state. You will find that the most important variables which determine the price of a house are its size and the area in which the house is located. Depending on your needs, you can find the perfect balance between those two, and then opt for a 40 year mortgage and start living in your new home. This mortgage basically opens the doors to buyers who didn’t use to think that a new house is a possibility given their limited available funds.

Another problem that comes up when you apply for a home loan is that of the “debt to income ratio”. Getting a home loan is not as easy as it used to be previously. Financial institutions are going to check your credit history and if they find that you have a high debt to income ratio, which means that your debt in the market is way above you credit capabilities, then your application for a home loan will get rejected. The 40 year mortgage lowers the debt to income ratio, by dividing the monthly installments that you have to pay by the 40 year term, and chances are that your application for a 40 year mortgage might be approved even with the same credit that got rejected for a 30 year mortgage.

Those are only a few of the reasons why I feel that you should opt for a 40 year mortgage. Nevertheless, at the end of the day, it all comes down to this – You now have the opportunity to become the proud owner of your dream home. With lower payment schemes and ease of approval, this 40 year mortgage is surely a borrower’s delight.

By the way, here is the link to a discounted Wall Street Journal Subscription for all of you who emailed me about it.

The Success Of The 40 Year Mortgage

A 40 year mortgage gives people a chance to opt for a home loan where they would have 40 years to repay that loan amount in equated installments. The extra 10 years that this mortgage plan is offering on top of the conventional 30 year mortgage term, helps in reducing the installment amount for the borrower and gives them the capacity to opt for their new dream home within their limited budget.

However, if you look at the scenario properly you will find that the borrowers have to pay more than what they would usually pay for with a typical mortgage plan because the interest for the extra 10 years piles up on the amount. Still, a 40 year mortgage is better than the conventional 30 year one, mainly due to the convenience of smaller installments that do not put pressure on the borrower.

The rules and regulations of financial institutions in lending home loans have changed a lot as well. At present, financial institutions grant loans depending on the current salary of the borrowers. This means that the greater the amount of installment that you have to pay the lesser is your chances of getting a home loan. That is due to the fact that the financial institutions, during this tragic recession, want to keep it safe. Thus if you do opt for the 40 year mortgage term, your installments become smaller and financial institutions will thus consider your application for a home loan.

Smaller amount of installments mean that there is always a steady flow of money in to the market with homeowners paying up their loan on time. This keeps the financial market in motion and ensures a steady income for the financial institutions. Moreover, with such convenience and encouragement customers would now opt for their dream homes that seemed impossible without this opportunity.

The 40 year mortgage system is proving itself as one of the most successful market strategies for business in both the financial and real estate sector. For us consumers too, this is a good option since not only we have a smaller installment payment to burden us every month in order to repay our loan, but we can also choose from a host of repayment options available with this scheme.

The real estate market and the financial sector have both taken a hit with the present financial meltdown, and thus the 40 year home mortgage is a strategy that is trying to revive both. Borrowers can opt for this scheme, if they wish to pay lower installments for their mortgages than they presently have to pay with the 30 year mortgage.

Financial institutions have opted for 40 year mortgages in anticipation that this scheme will relief borrowers from the extra burden of high installments that one has to pay for his or her dream home. Moreover, smaller installments can ensure a steady flow of money from the borrowers, which are much better than higher installments leading to lots of debt in the present situation.

The present financial condition demands a steady flow of cash for financial institutions, rather than an increasing number of non-payers due to the overburdening of huge installments. The 40 year mortgage allows you to possess your dream home when that would be next to impossible with a 30 year mortgage. It is a choice that the borrower has to make in terms of money over time. The 40 year mortgage no doubt will take more money out of your account, since you have to pay the extra 10 year interest but it also allows you the flexibility of paying in smaller installments because it also means that the entire loan amount will be spread out for another extra 10 years.

You will have the option of getting a 40 year mortgage plan with different types of interest rates. You can take your pick from the fixed rate interest plan or the adjustable rate interest plan, according to your choice and convenience. This 40 year plan is becoming popular among borrowers, since it is an opportunity that has enabled most people to opt for their dream home that had become impossible or better yet, improbable, with the economic crisis ringing throughout. In these times, where everyone is cutting down their costs, a 40 year mortgage plan seems like a blessing for both the borrowers as well as for lenders. Fannie Mae has provided a tool to secure your homes in the near future and forget the financial headaches.

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To help the affordability of the housing market, the now well-known 40 year mortgage was announced. In a 40 year mortgage period everything is remains as usual, but you will have to repay your mortgage amount in 40 years instead of 30 with slight higher interest rates i.e. your amortization period will be of 40 years. These mortgage loans are provided in the form of 40 year fixed or hybrid adjustable rate interest rate mortgage loans.  Let’s try and assess the 40 year mortgage specs, for the good or the bad.

Advantages
A major advantage of the 40 year mortgage (fixed rate) is reducing the monthly payment considerably by stretching out the amortization schedule over a longer period of time. It can help keep your payments get much lower. It’s proven to be a better home loan option to buy a house in a high-cost real estate market. It potentially increases the amount of houses you can afford and the amount of extra cash you have on a monthly basis. A 40 year mortgage would also work wonders if you are earning a high income and you are looking for a nice tax deduction to be taken off your monthly payments.

Drawbacks
With so many advantages of a 40 year mortgage, it also comes with some drawbacks. A 40 year mortgage lender charges higher interest rates for providing longer repayment periods. Its other disadvantage is that most mortgages are paid off early anyway, when the borrower refinances the loan or sells the home. In this mortgage you build equity more slowly, so when you decide to sell – if you ever do – chances are that you might have to sell at a loss since you’ve paid more to own the house. It also creates a headache for bankers, as they have to create a tool that calculates the effects that are caused by interest rate changes, in a variety of scenarios that might arise. This would help the bankers to be prepared for any possible drawbacks that they might face.

A 40 year mortgage has many flaws; but still it can be good choice for many buyers. The people who plan to stay in their houses for a long period should opt for such a loan. However, since the average American moves every seven years, in most cases it doesn’t make any sense. Do you research and you will find other kinds of mortgages that will eventually cut your payments down as a 40 year mortgage would or even more. An interest-only mortgage might be the way to go. Taking on that kind of a mortgage will reduce your payments however don’t expect to build equity with it. In the end, the decision is for you to take, whether you want to go for that mortgage plan or not.

You need to try and find a way to calculate the value of different proposals you get from banks in regards to your 40 year mortgage. Calculate the total interest rate considering both fixed and floating rates. All you need to do is to put your figures into some Excel cells and make an – as accurate as possible – assessment of possible changes in the rate, which is not as difficult nowadays since our news platforms are many times ahead of the current news.. Obviously, you can’t expect to achieve exact figures. If you could do that, then you would be a millionaire. Your aim here is to find the answer, or better yet, to get close to the answer of whether you should go for a fixed or floating interest rate mortgage.

The only thing I can guarantee is that the bank or your friendly personal banker is not going to do this for you. You should not even consider expecting them to do that since they just won’t – it wouldn’t make sense for them to do it for you. Think about it. Let’s assume that a banker has the ability to sit down, work out some numbers on a spreadsheet, and predict that at some point within the next 40 years, you will most likely see a big decrease on interest rates. Why would he ever tell you? If you were selling a house, knowing that someone has recently closed a deal for a factory to be constructed right next to it, would you ever tell your prospective buyer? Of course not, that would make you a lousy salesman. Trust me when I say this, but banks are the complete opposite of lousy.

My advice to you is not to try to predict all the future changes in interest rates, but try and pin point major changes in interest rates during your 40 year mortgage in order to get an idea of whether you should go for a variable or a fixed rate. After you are able to find those major changes, you only need to put your common sense together with your facts and figures and head straight to the bank to get your questions answered. You need to make sure that you get your facts straight before getting in a 40 year commitment. You need to keep in mind, that the security of a fixed rate, which means knowing the amount of money that we need to deposit to the bank on a monthly basis, is not always to best way to go. It is safer, that’s for sure, but if you decide to avoid going for a floating rate mortgage package, you might be missing out on some great interest rate decreases.

First, comes the ultimate immaturity and silliness which often describes the way that newspapers deal with that dilemma. Then, it’s the plethora of bank advertisements which often promote one rate or another according to their own interests and not the interests of their prospective customers. I am sure many of us have already forgotten that when interest rates started falling, banks started heavily promoting fixed rates which used to be lower when compared to the variable – back then – ultimately hurting their very own mortgagors. Another thing to consider is the failure, inability, lack of training, or even lack of training tools which are being made available to the bank’s staff. Lastly, there are various changes in the factors that seriously influence the fluctuation of interest rates which didn’t use to be so important or even related to the factors that influenced changes in interest rates 10 or 20 years ago. The “mortgage game” has now gone global.

The biggest challenge for banks, or any banker, is to create a tool that calculates the affect that interest rate changes in a variety of scenarios in order to be fully prepared. Believe me, it is extremely difficult to make such a tool that shows accurate results concerning 40 year mortgage rate estimation. If it wasn’t, it would already be out there in the market. It took me many years of hard work to even try and go for it. Then again, the more difficult a challenge is, the greater the returns both psychologically and monetary. Imagine after putting a few good days of work on something and then watching it work flawlessly. I can tell you from personal experience… It’s a great feeling.

Now go ahead and read the second part of “40 Year Mortgage – Fixed Or Floating Interest Rate?”. I just couldn’t give you the full story in one article, I needed to add some suspence!