The 40 Year Mortgage

With the meteoric rise in house prices until recently, new types of mortgages are being developed, enabling people to purchase a home. Home prices will not remain depressed forever. The 40 year mortgage is a way to get someone into a home by lowering monthly payments.

The 40-year mortgage is just a variation of the more common 15 or 30-year mortgage. The payments are just extended for a greater length of time. You are extending the amortization period, or the amount of time needed to pay off the principal. A variation on the 40-year mortgage is one that is a 40-year adjustable, meaning periodically throughout the duration of the mortgage your rates can adjust upward or downward. A key index like the 10-year government Treasury note is used as the guideline for the adjustment of the mortgage rate. What could possibly happen is that interest rates might rise substantially in the future. This would wipe out your advantage of the initial lower rates if you take an adjustable 40-year mortgage. Check how frequently the ARM (adjustable rate mortgage) resets. Generally, if you know you will be moving before the mortgage resets, an adjustable rate 40-year mortgage can be beneficial.

The most optimistic outcome for a 40-year mortgage is that since your payments are drawn out over a longer period of time, monthly payments are less. This would help people who do not have enough funds to pay the monthly amount for a 30-year mortgage. It will get them into a home. As life progresses, the homeowners will probably earn considerably more money. Besides, most people move before the mortgage is completed. In that case this 40-year mortgage will not be permanent.

A drawback with the 40-year mortgage is that it generally has a higher interest rate than a 30-year mortgage. You will pay less monthly because you have an additional ten years to pay off the mortgage, but a slightly higher interest rate will be charged. Please keep in mind that when you pay a mortgage, the interest is paid before the principal. This is why you see that your equity in the home in the early years increases ever so slightly. Also, the longer your loan the more interest will have been paid. That means in the end your $200,000 home might have in reality cost you well-over $400,000, if you stayed in the home until the mortgage was completed. The less years on your mortgage agreement, the more your monthly payments, but you pay less interest in the long run.

It will take some homework to analyze your individual situation and see whether a 40-year mortgage fits your needs. Check a mortgage table. The following example should be helpful. Consider a $200,000 home at a 5% interest rate. A 15-year mortgage would be $1582 a month (keep in mind insurance, upkeep and other expenses that go along with all mortgages). The same mortgage for 30-years would be $1074. For a 40-year mortgage your monthly payments would be down to $964.