Old 40 Year Mortgage
Until recently, a 40 year mortgage was almost unheard of, and I certainly had not heard about it until I started researching these things a little more thoroughly. Apparently they are becoming more and more popular in certain areas where the cost of new homes is much higher than the national averages. So you, as new home buyers, might be tempted to think that a longer mortgage such as this would be a great idea to allow you to purchase that expensive home you have been dreaming of, but is it really that simple? Are 40 year mortgages worth saving a hundred or so dollars per month even if it means greatly extending the length of the loan? That is what I will be exploring in this article.
Obviously the main reason that most borrowers of a 40 year mortgage become interested is the lower monthly payments without the need for an adjustable rate mortgage. That fact alone can cause its own problems. When you do the math and work it all out, you will probably find that the savings you gain from lower monthly payments may not be as great as you may have anticipated. A longer mortgage such as this, can also allow you to make a small down payment. But you have to ask yourself, is it worth it to save a hundred or so dollars per month in exchange for getting stuck with a loan that you will be paying off for much longer than usual? That is something that only you can decide as it depends on your individual financial situation.
Another aspect of 40 year mortgages that is important to consider is that they generally come at a higher rate than a standard mortgage, and this can eat away at what little amount of savings you thought you would be getting from choosing this option. A higher rate is charged simply because the lender’s money is tied up in your loan for longer than usual, and there is a longer period of time in which a default could occur, so they wish to be compensated for these extra risks.
So, as I have been saying all along, there are pros and cons to getting some savings and going with the higher 40 year mortgage rates, and that means you will need to work it out for yourself whether it will fit your situation. That means the question of whether or not a 40 year mortgage is a good idea in general is not the right question to be asking, because it is more personal than that.
40 Year Mortgages - The Truth!
Ok, I have something to say about 40 year mortgages. There is so much bad press about a 40 year mortgage and 40 year mortgage rates being high. They tell us that very little of our monthly premium is paying down the principle and so much is paying for interest for a very long time. Some conventional lender is touting his wares by trying to convince us that 30 year mortgage rates help you pay down your balance so much more quickly. Well, I’ve got news for you Mr. Banker. At the moment I can’t qualify for one of your “more appealing home mortgage loans” and I would much rather pay a few dollars every month for ten of those 40 years on a home of my own than to pay a landlord $1000 a month for something I will never own. Furthermore, I will never have a prayer of owning ANYTHING if I keep paying the mortgage for someone else. A 40 year mortgage gives ME the opportunity to own MY own home NOW even if I don’t make enough money to qualify for a loan at 30 year mortgage rates.
Take a look at these figures and see if you don’t think a 40 year mortgage is a good thing. I’m going to go conservative and say a house sells for $100,000. Let’s say you can put 10% down and current mortgage rates are 6.5 %. If you run the figures at these conventional 30 year mortgage rates you come up with mortgage monthly payments of $710. Remember, you don’t qualify for 30 year mortgage rates. This is hypothetically what your landlord is paying. So you are giving him a monthly profit of $290. This is money YOU could be putting in YOUR pocket. Now let’s look at the loan you are able to qualify for offered by 40 year mortgage lenders. Taking the same figures and adjusting them accordingly for 40 year mortgage rates. We are talking about the same $100,000 home but you can realistically only put down $5,000. (Usually you need at least 10 or 20 percent but I am assuming you can’t come up with that amount.) Remember the interest rates are higher on a 40 year mortgage so we will go with 7%. Now if you run the 40 year mortgage calculator you would be paying $690 a month. That means that you will realize a difference of $310 per month below what you are paying your landlord.
Think about it! You can own your own home and pay the electric and maybe the other utilities as well with what you are now paying your landlord to rent his home. This is all possible because of an entity called a 40 year mortgage. I don’t know about you, but I would rather pay a higher interest rate and a few dollars a month on the principle of my own home than to pay a thousand dollars a month to rent a home that will never be mine. I guess Mr. Banker took his bonus we paid him with our tax dollars to figure out a way to keep the rest of us down. I think I’ll stick with my 40 year mortgage, thank you very much. (And btw, in a few years when I have been able to save some money I will refinance at 30 year mortgage rates. Let’s see who’s laughing now, Mr. Banker. I’ll be laughing all the way to the bank. I can assure you it WON’T be yours!)
