Best 40 Year Mortgage

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.”

With the recent problems in the housing market, due to an increasingly ailing economy, many homeowners are struggling to afford their mortgage payments. This has prompted some homeowners to consider a 40 year mortgage. A normal mortgage amortization period would be anywhere from 15 to 30 years. With a 40 year mortgage however, the homeowner usually opts to extend their current fixed-rate mortgage to 40 years, in order to lower the monthly cost of their mortgage payment. Many home buyers also choose to start their mortgage at a 40 year amortization rate so that they can afford the house that they want to buy. If you are considering a 40 year mortgage for your current or potential property, then it would be wise to learn as much as you can about 40 year mortgages before you make such a crucial financial decision.

The proponents of 40 year mortgages would point out the obvious advantage of opting for a 40 year mortgage on your property, and that is the fact that you will have lower monthly mortgage payments. If you are having trouble figuring out exactly how much you stand to save by extending your mortgage period to 40 years, then you can use a tool known as the 40 year mortgage calculator. This tool will allow you to calculate the difference that a 40 year mortgage would make for you, so that you can gage the advantages of such a decision. Sometimes choosing a 40 year mortgage can allow you to buy a house that you could not afford with a shorter mortgage period.

The downside however is that a 40 year mortgage carries higher interest rates than other shorter amortization periods. In fact the interest rate can be as high as .400 percentage points higher than a 30 year mortgage on the same loan amount! These interest rates can add up to a very hefty sum over the years, and you could end up paying more in interest than the value of the mortgage loan itself! So the difference between the interest rates of a 30 and 40 year mortgage can be quite staggering depending on the conditions of the loan. You will also have to deal with the fact that the equity on your home will build at a snail’s pace in comparison to the equity of a home with a 30 year mortgage. There are several alternatives that would allow you to speed up the equity building process, but they also have their downfalls as well.

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.

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!