It’s true: 40-year mortgages are real. They are not nearly as common as the traditional 30-year fixed rate mortgage, but they are a product some lending companies offer.
With a 40-year mortgage, borrowers establish a rate that will be fixed for a 40-year period. At the end of the 40-year mark, the borrower will own their home outright, assuming they did not refinance.
These ultra-long loans come with both advantages and disadvantages. A smart consumer will research all available options to determine which is the best for them. There is no doubt that 40 yr mortgage rates could hurt you financially if you are not careful.
Disadvantages of a 40-year mortgage
40-year mortgages come with higher interest because the loan is so long term. A general rule of thumb, the shorter the loan length the less a borrower will pay in interest. Paying 10 additional years on a mortgage (in comparison to a traditional 30 year fixed mortgage) adds 10 additional years of interest as well. If you refinance with a 40-year mortgage, even more interest will be added. As you can see, these payments can really add up.
For example, if a borrower takes out a $250,000 loan with a fixed interest rate of 5.75 percent for a 30-year term, the monthly payments would be $1,458.93. Taking a 40-year mortgage with the same value and interest, a borrower could save $83.40 a month. The interest, however, will increase. Using the same example, a borrower would pay approximately $135,000 more in interest with a 40-year fixed mortgage than a 30-year fixed mortgage. That’s over half of the initial loan’s value.
Many finance experts warn that the difference in payments between a 30-year fixed rate mortgage and a 40-year fixed rate mortgage are not that significant – perhaps only a couple hundred dollars a month different – which definitely does not account for the extra interest tacked on over the life of a loan.
Before acquiring a 40-year mortgage refinance, you’ll really need to do the math. Lower monthly payments may not make up for the amount of interest you will end up paying over the life of the 40 year loan.
When considering a 40 yr refinancing mortgage loan, you should consider the closing cost and other factors, too. The upfront cost of a thirty year mortgage could be less expensive than a forty year.
Equity builds slowly with a 40-year mortgage. This can be a serious drawback for consumers who abruptly need to sell their property. They might not have enough time to save, or enough equity to cover the costs of selling. If the market is not strong at the time of the sale, it can be especially burdensome.
Lastly, not all lenders offer 40-year fixed mortgages. This can make your research a little more trying. Because of the lack of lenders, you also need to make sure the lenders you do come across are trustworthy. It’s important to do as much research on the lenders and the rates of your future refinance.
40-year mortgages might be a safe bet if you plan to stay in your home forever, but it’s important to become educated on the disadvantages of the program. (Photo/Wikipedia).
When does it make sense to get a 40-year mortgage?
A 40-year mortgage could make sense for some borrowers who are especially strapped for cash and rely on a lower payment to qualify for a larger loan amount, or who want the lowest possible payment for the longest amount of time.
A 40 yr mortgage can allow for flexibility in a borrower’s budget because of the lower monthly payment. And if financial circumstances change, consumers have the ability to make extra payments to pay off the loan faster than the 40-year mark. If you predict your income will increase, you might also be able to refinance to a shorter-term loan that could help offset the interest you’ve already paid.
If you plan to sell the house soon, the lowest 40-year fixed mortgage rates available might be a strategic move for you. On the flip side, a 40-year mortgage could also be an OK option if you plan on staying in your house indefinitely. This will depend on your current financial situation and the housing market in your area.
Though it’s not a particularly wise decision in most cases, a 40-year fixed mortgage can allow borrowers to purchase a more expensive home for the same monthly payment as a 30-year fixed payment.
Are you a high-income earner? There could be a potential tax write off for the large amount of mortgage interest that occurs with a 40-year fixed mortgage.
For those in a financially strapped situation, effective June 1, 2005, Fannie Mae began offering standard whole loan commitments and MBS pool purchase contracts for delivery of first lien fixed-rate and certain adjustable–rate mortgages (ARMs) with 40-year terms. This might also be a situation that 40-year mortgages make sense.
What alternatives to todays 40-year mortgages are there?
A 40-year mortgage might be perfect for you. But, it might not be. Here are a few alternatives to consider before closing on a 40-year mortgage.
Interest only loans. Depending on your goals and your credit, interest only loans might accomplish something similar to a 40-year mortgage. An interest only loan is when the borrower only pays the interest on the mortgage through monthly payments for a fixed-period of time. The term is usually short, between 5 and 7 years. Similar to how an ARM works, once the term is over, the principal and payments could increase. Or, you can refinance your home to secure a lower rate.
Borrowing less with a shorter term loan. If a 40-year loan is right for you because of the monthly payments, can you downsize? Is it possible that you’re stretching yourself too thin, financially? If you’re overextending yourself with your mortgage, you could find yourself in a sticky situation in the event of a loss of income or major emergency.
The best way to determine your financial situation is to use a mortgage calculator. You change adjust loan lengths from 15 to 30 to 40 years and different interest rates to watch how the monthly payment changes. You can also consider making a larger down payment and financing for a shorter term.
Find a mortgage broker or lender
A mortgage broker is a middleman between you, the borrower/homeowner, and your lender. Brokers work with numerous banks and are able to match borrowers with mortgage programs that fit their needs best. Picking the proper mortgage broker will make a huge difference while you’re deciding if a 40-year mortgage is for you. You’ll need someone you can trust. They can inform you of other products that might be a better fit for your financial situation. As an alternative you can always contact 40 year mortgage lenders directly.
The U.S. Department of Housing and Urban Development provides free access to professional counselors in some states, also. HUD can help you find the best mortgage by laying out a variety of options for you. Asking for advice is especially important before choosing a long-term and higher- interest option like a 40-year mortgage.
The bottom line with current 40-year mortgages is that, with any financial decision, it will depend on your financial goals and objectives. But before deciding, you need to look at your situation objective, ask a mortgage professional, and do your homework to ensure you’re making a wise decision.
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