40 Year
mortgages:
Mean lower
monthly
payments,
slower
equity
Rapidly
rising home
prices could
increase the
popularity
of 40-year
mortgages.
For a given
amount, a
40-year
mortgage
carries
lower
monthly
payments
than a
30-year home
loan. That
means a
40-year
mortgage
allows you
to afford a
slightly
more
expensive
house. The
longer loan
term has
disadvantages:
You pay more
interest and
build equity
slower.
Forty-year
mortgages
have existed
for a few
years and
have
gradually
grown in
popularity.
Not all
lenders
offer them,
and lenders
structure
the loans in
different
ways. A few
lenders
offer
40-year
fixed-rate
loans, just
as they
offer
15-year and
30-year
fixed-rate
mortgages.
More
commonly,
lenders
offer a
40-year
amortization
on
adjustable-rate
mortgages,
or
ARMs. A
customer
might get a
5/1 ARM with
five years
of fixed
payments and
35 years of
annual rate
adjustments
thereafter.
Making room
for more
house
No matter
how the loan
is
structured,
the benefit
to the
borrower
remains the
same: lower
monthly
payments.
Here's how:
Let's say
you can
afford to
pay $1,750 a
month for
principal
and
interest,
excluding
taxes and
insurance,
and that you
can get
either a
30-year or a
40-year
mortgage at
7 percent
interest.
(That would
be a high
rate in the
middle of
2002, but a
low rate in
most years.)
With the
30-year
loan, you
can afford
to borrow a
maximum of
$263,044.
With a
40-year
loan, you
can afford
to borrow up
to $281,610.
The 40-year
loan allows
you to
borrow more
than $18,000
more.
Slow equity
loan
You pay huge
interest for
the
privilege of
taking out
that 40-year
loan for a
slightly
larger
amount,
though:
$191,426
more. That's
how much
more
interest you
would pay
over the
life of the
40-year loan
in the
example
above --
partly
because
you're
borrowing a
little more,
but mostly
because
you're
paying
interest for
40 years
instead of
30 years..
That
objection to
40-year
mortgages
has a flaw:
Most
mortgages
are paid off
early,
anyway, when
the borrower
refinances
the loan or
sells the
home. Hardly
anyone is
going to
make
payments on
the same
mortgage
for
40 years..
There are
other
drawbacks to
a 40-year
mortgage:
You build
equity a lot
more slowly.
With that
40-year loan
in the
example
above, you
would pay
$107.29 in
principal
the first
month. With
the 30-year
loan, you
would pay
$215.61 in
principal
the first
month --
building
equity
quicker on a
slightly
smaller loan
amount.
Although
borrowers
can use
40-year
mortgages to
squeeze into
more
expensive
houses,
that's not a
great reason
to get one.
Saving smart
can still
pay
This advice
comes from a
guy who had
a 40-year
loan on a
previous
mortgage. He
didn't get a
40-year
mortgage to
buy more
house than
he could
afford
otherwise;
he took out
the longer
loan so he
could invest
the
difference
between the
payments on
a 30-year
loan and a
40-year
loan.
If you take
the 40,
immediately
bump your
monthly
savings into
an
investment
portfolio by
at lest that
amount. This
investment
strategy
should be
used only by
disciplined
savers to
build their
equity
outside of
their
personal
residence.
If you can
invest the
monthly
difference
over the
long term at
a rate
greater than
your
mortgage
rate, then
you will
build more
wealth.
Some people
are looking
to just get
in there
initially
and get
established,
get on their
feet, and
more than
likely in
the next
five or
seven years,
they'll be
refinancing
anyhow.
40-year
mortgages
are very
similar to
interest-only
mortgages.
Both are
sometimes
used by
people who
expect a big
pay increase
in the next
few years,
or who plan
to own their
houses for a
fairly short
time and
feel
confident
that sale
prices will
appreciate.
Request a
mortgage
quote
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quotes from
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lenders in
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