The 40-year mortgage

The 40-year mortgage is growing more popular, but is it a true answer to debt relief? Many loan officers are promoting lower mortgage payments, citing the 40-year long term as a huge benefit to cash-strapped homeowners. But how exactly are they beneficial?

President of the website MortgageGrader.com, Jeff Lazerson, stated that the 40-year mortgage “is a joke.” He continued, “Amortizing a loan over 10 more years does very little to decrease the payment, and the industry has historically priced 40-year loans more expensively than 30-year loans, so the benefit that the consumer perceives they should get, [in reality] they don’t get.” It’s typical for these loans to have a higher interest rate, and over four decades the consumer will pay far more in interest than someone with a 30 year mortgage.

An example

To see how a 40-year mortgage weighs against a 30-year mortgage, here is an example. If a consumer borrowed $ 100,000.00 with 5% interest for 30 years, the monthly payment works out to about $ 540. At the same rate, a 40 year mortgage would reduce monthly payments by $ 54, to $ 482.

Typically finding a 40 year and 30 year mortgage with the same interest rates is impossible. Normally 40-year mortgages come with a higher interest rate automatically. Looking at this example with a 5.25% interest on a 40 year mortgage, lowers the payment to $ 499 a month. That would save about $ 37 a month, compared with the 30 year mortgage.

The real savings come into play when you look at the overall interest payments on the lifetime of the loan. See the chart below for the final numbers.

In the end, the 40 year mortgage at 5.25% adds up to $ 46,560 in payments. That is A LOT, especially since you only save $ 37 a month – which amounts to little more than beer money. Is an extra $ 37 a month going to actually provide any debt relief if you lose $ 50,000 over the long run?

The Upside

There is a small percentage of people who would opt for the 40-year mortgage. These are people who aren’t concerned, at least too much, with the ultimate length of the loan, but want the lowest possible payment. Robert Satnick, president of Prime Financial Services, stated, “What’s nice about a 40-year loan—if it’s not an interest-only loan—is that they are contributing something, even though it’s a small amount, to pay down their principle. It increases the pride of ownership, rather than, at the end of the five years, [consumers end up] owing as much as they borrowed.”

A Way to Maneuver

The 40-year mortgage can also be managed by making larger payments. Bob Walters, Chief Economist at Quicken, stated, “The term of the loan doesn’t have to be locked into 40 years. You can’t make it longer, but you can certainly make it shorter.” Extra payments, and paying the loan off quickly, will benefit borrowers greatly in the long run. Walters added, “People can still benefit from a 40-year loan by paying it off quicker, taking advantage of the lower payment, but adding money to it as they move along.”

Consumers Decide

For consumers looking for monthly debt relief, the 40-year loan may be a viable answer. As long as they know that the money they pay for interest will be greater on a 40 year rather than a 30 year, if they follow the loan structure. If a consumer is looking to sign up for a 40-year mortgage, they should understand the terms and conditions, and then choose wisely.