A 60-Second Guide to 40-Year Mortgages

[Jun 12, 2009.]

 

There are still lenders advertising 40-year-mortgages. While not all mortgage lenders offer these loans, the government's mortgage rescue plan allows the terms of a mortgage loan to be extended to 40 years from 30  to help reduce monthly payments. But are 40-year mortgages a good idea? Here are some things to consider.

Lower Payments, More Interest

Most people who choose 40-year loans are looking for lower monthly payments on their mortgage than they'd get with a 30-year loan. People who live in expensive housing markets may be more likely to want a 40-year mortgage loan. Furthermore, with so many homeowners struggling to make monthly payments on their mortgages, the 40-year option could mean the difference between keeping a home and ending up in foreclosure proceedings.

But the trade-off for a lower payment is owing more interest over the life of a mortgage loan. For example, a 40-year mortgage loan for $280,000 with an interest rate of 5.5% would have monthly principal and interest payments of $1,444.16. The amount of interest paid over the life of the loan would be $413,195.26. That compares with a 30-year loan for the same amount at 5.5%, which would have monthly payments of $1,589.81. The total interest paid over the life of that loan would be $292,331.31. The monthly payment on a 40-year mortgage isn't really much smaller than on a 30-year loan, but the difference in overall interest payments is huge.

It Takes Longer to Build Equity

Since most of the early payments of a 40-year mortgage will go toward the interest, it will take longer to build up equity in a home. That means that a borrower who pays for mortgage insurance (MI) will have a longer period of time before they build up the 20% home equity that is usually required before MI can be cancelled.

Mortgage Loans Can Be Refinanced

The 40-year mortgage isn't going to appeal to many people. On the other hand, some would argue that a 40-year mortgage can later be refinanced into a 30-year (or smaller-term) loan, making it a viable option for financing a home. However, there is no guarantee that mortgage rates will be attractive at the time of a refinance. But if refinancing isn't an option, a homeowner could choose to escalate the monthly payments on a mortgage to pay it off sooner than 40 years.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.