As the cost of real estate has risen significantly over the past years, many lenders have started offering new products to assist homeowners with their mortgage needs. One of these new mortgage offers is the 40 year home loan. Here are the pros and cons of this 40 year mortgage deal.
A 40 year mortgage is simply a mortgage with a 40 year amortization schedule. This means you will pay interest and loan principal to the mortgage lender for a 40 year period. The advantage of a 40 year mortgage is that the monthly payment will be much lower than a traditional 15 or 30 year mortgage. Suppose you borrowed $100,000 to purchase your home at 6.25% interest with a traditional 30 year mortgage; your monthly payment for this loan would be around $600. If you financed the same home with a 40 year mortgage you would pay a higher interest rate for the longer term; however, your monthly payment would be around $560. This might not seem like a lot, but if your monthly budget is stretched thin this could make a difference for you.
There are disadvantages to 40 year mortgage deals. Because the term is longer than a traditional mortgage there is more risk for the mortgage lender; this risk is passed on to the borrower in the form of a higher interest rate. The interest rate you will receive for this loan is typically .25 or .375 points higher than a traditional mortgage depending on your credit rating. Another disadvantage of this 40 year mortgage is that you will make significantly more interest payments to the lender for that extra ten years of your mortgage. Mortgage loans are front loaded with interest; this means you pay most of the interest in the early years of the mortgage loan. This means you will build equity at a painfully slow rate with a 40 year mortgage deal.
Financing your home with a 40 year mortgage could tempt you to purchase more home than you can actually afford. This could lead to serious financial difficulties down the road. A 40 year mortgage could still be a good deal for homeowners that need low monthly mortgage payments. You can always refinance down the road when your financial picture improves; this will allow you to switch to a mortgage that builds equity in your home at a faster rate. To learn more about your options when it comes to your mortgage, register for a free mortgage guidebook using the links below.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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