Examining The Forty-Year Mortgage

The conventional mortgage plan lasts for 30 years. On the other hand, 40-year mortgages can help reduce the cost of monthly payments. Is it worth adding 10 more years?

The Benefits Of The 40-Year Mortgage

Although 40-year mortgages are often seen as risky, this view is taken out of context. When you look at the individual needs of the borrower or at how it compares to other lending plans, a longer mortgage could be beneficial. The loan itself does not really pose a risk as much as the borrower’s behavior.

The main reason 40-year mortgages are attractive is because of the lower payments spread over an extra 10 years, unlike the traditional 30-year loan. A longer loan period is the most appealing to those living in high-cost real estate markets, borrowers that want a larger home or those that cannot qualify for a 30-year mortgage. The longer term also works out nicely for people who do not plan to move anytime soon.

The Drawbacks Of A Forty-Year Mortgage

The problem with a longer loan is that you end up paying more over the life of the loan. Furthermore, the interest rates are usually higher, somewhere between 0.25 to 0.375 percent more than on a shorter-term mortgage. This increased cost could definitely affect monthly savings.

Another issue to consider is that you do not pay the principal down on a 40-year mortgage as quickly as on a 30-year loan. Combine this with a decrease in home values and those with a 40-year mortgage may feel like they are in financial trouble.

Calculating The Differences On Mortgages

Let us take an example and figure out the difference between the 30- and 40-year fixed rate mortgages. A mortgage for $300,000 at six percent comes out to a total of $1,798.64 every month and $647,515.44 paid over the life of the loan. The same mortgage over 40 years at 6.25 percent will be $1,703.22 and $817,543.33 overall. So, while the monthly payments are lower, the life of the loan costs considerably more.

The more a homeowner invests in the home, the less they get back since the investment is not generating return. The value of the home is where you make the profit. With a 40-year mortgage, you have more leverage with equity growth in smaller monthly payments. On the other hand, you can apply the same leverage with other mortgages as long as you qualify for them. At any rate, the 40-year mortgage is advantageous for those with a solid understanding of how it works as well as a strong financial plan for their future.