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.
Welcome back… without further ado, let continue.
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.
Through this 2 part article, I am going to try and smoother a great challenge for all those considering a 40 year mortgage. Should you go for a mortgage with a floating or a fixed interest rate? Every single day, prospective mortgagors face the dilemma of choosing between fixed or floating rate mortgages. Making the right decision is certainly not easy, especially when one has to face the following problems – I hope you don’t mind my bluntness:
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!
