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.”

It is great to stand hand in hand with the side of the government, since for some this may prove highly effective and very profitable. However, this is the case only for those very few of us who have plenty of money to begin with. It is common sense that someone who has already enough money in the bank can easily buy a beautiful house through a mortgage, whilst keeping his money in his savings account collecting interest month by month. Who profits from that? You guessed that one right… our beloved banks. Any bank would take advantage of that simply by keeping the interest rates at high levels and allowing the tax payers money to take over the weight of the purchase. Let’s assume that someone who makes the average $40k to $50k per annum, decided to purchase a house valued at $300k. Let’s further assume that he is paying for the full amount of this purchase in cash. That person will definitely have to run through all the numbers together with his accountant in order to decide what the proper way to proceed with his purchase is.

There are a few things that you have to consider before making your move in the above scenario. On way to do it, is to actually go ahead without getting a 40 year mortgage, and paying with the available money. By doing that, he will also get a nice tax deduction and he won’t have to pay for all the fees and interest imposed by the bank in the case of a 40 year mortgage, right? Wrong! Well, not completely wrong… what I meant to say is that even though the previous statement is correct, it’s not telling us the whole truth. The money spent for the purchase of that house could be earning interest if it was sitting in a savings account.

What the person in question has to do in order to evaluate the best way to proceed, would be to compare the interest that his money will be getting within a 40 year period against the total interest that he will have paid to the bank by the end of that 40 year mortgage. Yes, you guessed that one right, obviously the latter will be higher than the former. Then again…. who has that much savings?

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.