Best 40 Year Mortgage

At a certain age, a 20 year mortgage sounds like a good idea and at another age, the magic number might be 5 years. But the big question is, “is a 40 year mortgage a good idea?” Well, here are some pros and cons. And never mind calculating in your own age and thinking, oh in 40 years, I’ll be 75, 80, 102 or whatever. That is not the point. The point is that your mortgage is spread out even finer and the end result is that you get a much lower monthly payment. Sure over time you do pay more but because each month’s mortgage payment is lower, you have more disposable income. This can save you a lot of money over time as well because you have the cash on hand to keep your bills paid on time and your credit card debt low.

It’s all about timing. In the early years of your 40 year mortgage you might be raising children, starting up a business, getting out of the debt trap. This is when you need the flexibility of cash on hand. You won’t be building huge equity but chances are you won’t need it as much as a person with a higher mortgage payment. After all you will have a lower monthly debt load. I would recommend looking into jumbo mortgage loan rates for that purpose.

It is worth emphasizing that not only are you paying more over the long run, any 40 year mortgages will likely have a slightly higher interest rate. However, once the hard part of being a young parent or starting out in the business world is over, you do have the option of refinancing. If you are a patient person, you might even find there are incentives to refinance. If you are a new borrower it is not very likely for your current mortgage refinance rate to change anytime soon. Then again, the mortgage business is ever-changing and in the future it is more than possible that lenders will be courting those with 40 year mortgages to refinance.

You may not think you will want to refinance 40 year mortgage deals at the moment but you might. Here is one example. Think about having a 40 year fixed mortgage at a rate you think is great now but down the road, the rate might be significantly lower.  A 40 year mortgage at a superior rate is one thing. Having the rate drop while you are stuck in a long time commitment to a high rate is something else entirely. Make a careful list of the pros and cons that apply to your situation and the decision will become clear to you.

Your Introduction to a 40 Year Mortgage

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.”

Everyone dreams of owning a house and people who cannot afford to buy a house on their own opt for housing loans by borrowing money at a given rate of interest. There are many lenders out there offering various schemes for repayment of these loans. Some of these schemes are meant for short term repayment while some are for longer term.

Conventionally, 15 and 30 year mortgage schemes are preferred by most of the buyers.  If you are looking for longer term repayment plans, then you can opt for a 40 year mortgage or a 50 year mortgage scheme.  As a matter of fact, the 40 year mortgage is becoming increasingly popular.  Nevertheless, there are some disadvantages to it as we will discuss below.

To begin with, a 40 year mortgage spreads through a span of 40 years for repaying the loan.  That can be too long for some people.  Of course, if you have enough income to repay the loan within a shorter period, you can free yourself from the debt much sooner.  In that case, 40 year mortgage schemes are not be suitable for you.

If you are considering a long term mortgage, you should keep in mind that your interest rate will be quite higher than that of a short term mortgage.  It is obvious that people who are capable of repaying the loan amount within a shorter period should not apply for a 40 year mortgage, since the interest rates will make it more expensive. In essence, you are getting lower monthly payments, since they are spread out throughout more years, but you have to pay higher interest rates in return.

You will hear people claiming that a 40 year mortgage offers tax benefits for a longer span, and it’s true that they do.  However, once again those tax benefits would not be enough to make up for the higher interest rates.  Think about it, the repayment of a housing loan that is borrowed under 40 year mortgage in the year 2010 will be coming to an end in the year 2050. Waiting for a period of forty years to actually fully own your house and be debt free is too long. Then again, if you want to keep a healthy credit history, such a mortgage can be the best option for you.

Depending on the income and loan repayment capacity of an individual, an appropriate scheme must be chosen.  For instance, people with tight budgets SHOULD opt for a 40 year mortgage while people who can keep up with the higher monthly payments of a 15 or 30 year mortgage should apply for those.

Of course, there are almost no rules when it comes to mortgage shopping. The one and only golden rule that I can give you, is to do your research. I have seen 40 year mortgages being offered that had lower interest rates than 30 year mortgages. Keep your eyes and ears open for some of those great deals that come up every once in a while!