Lower Payments Possible with a 40-Year Mortgage
Mortgage Loan Plans Shouldn't Overlook this Relatively New Option
In the world of home financing and refinancing, homeowners and potential home buyers are seemingly inundated with a plethora of choices. From fixed-rate to adjustable-rate; from balloon payment options to reverse mortgages; from conventional to nonconventional, the variety of mortgage products can be confusing for even the most knowledgeable of consumers.
The 40-year Fixed-rate Home Mortgage
Over the years, the 15-year and the 30-year fixed rate home mortgages have, arguably, become the two most popular home financing choices. However, a relatively new kid on the home mortgage block- the 40-year fixed-rate mortgage- has been making headway since its inception in the late 1990s.
Who Benefits from Choosing this Type of Mortgage?
Due to the substantially longer time frame associated with the 40-year mortgage, monthly payments are typically lower than with other mortgage options- often substantially lower. Thus, for any given house, home buyers who would have a tough time making monthly payments on more traditional 15-year or 30-year mortgage loans can more easily fit the payments of the 40-year home loan into their budgets.
In addition, potential home buyers in high-priced real estate markets, such as California and many areas in the Northeast, could easily be squeezed out of the market if a home loan choice with lower payments, such as the 40-year option, weren't available. In fact, houses in very desirable neighborhoods, which were beyond the financial means of many would-be buyers, could easily have been dismissed if not for the affordability the 40-year mortgage brings to the table.
The 40-year fixed rate home loan is also a viable alternative for borrowers with a fairly short time horizon in mind. For example, the 40-year time frame really has no meaning if the homeowner plans to refinance or move after five years or so- as is often the case. After all, many people don't plan to live in the same house for even close to that length of time.
The Downside of a 40-year Fixed-rate Home Mortgage:
There are some disadvantages carrying a 40-year mortgage, however. Some of these include:
- Increased interest rate: While it's true that the monthly payment will be lower, the lender will typically raise the annual interest rate anywhere from a quarter to half a percentage point for this type of home loan. The reasoning behind this practice is that, based on the extra ten or more years added to the life of the loan, there is more of a possibility of default on the part of the borrower. In addition, the lender feels the need for extra compensation, since loan funds are being tied up during that additional time frame.
- Extra total loan cost: In the event the homeowner does hold the mortgage until maturity, it's good to be aware of how much more the mortgage loan will end up costing when compared with loans with shorter durations. For example, a homeowner would wind up paying an additional $56.677 interest over the life of the loan on a $100,000 40-year fixed-rate mortgage with a 6.25% interest rate versus a $100,000 30-year fixed-rate mortgage carrying a 6.0% interest rate.
- Much slower equity growth: Equity, which is a very important benefit of home ownership, is built up at a slower pace when compared to 15-year and 30-year home mortgages. The difference is rather dramatic. For example, based on a 30-year 5.75% fixed-rate mortgage for $200,000, a borrower would've accumulated $16,389 more in equity over a 10-year time frame compared to the 40-year loan with the same interest rate and amount.
- Possible refinancing problems: Due to the slower accumulation of equity over a given time frame, it may be more difficult for borrowers to refinance their homes- a key component mortgage lenders consider during the refinancing process.
40-yr. Mortgage
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