- Personal Finance
40 Year Mortgage Advantages and Disadvantages
There are advantages and disadvantages to getting a 40 year mortgage. Obviously, it will take longer to pay off than a 30 year mortgage, but there are other things to consider as well. Here are some things you should consider before deciding to finance your home with a 40 year mortgage.
Advantages of a 40 Year Mortgage
One advantage of a 40 year mortgage is that the payment will be lower than on a 30 year fixed rate mortgage. The reason for this is that you are paying the loan back over a longer period of time, so the amount of the monthly payment will be lower. If you are trying to buy a house that is a little bit of stretch for your budget, using a 40 year mortgage to finance the home may help you qualify for the mortgage.
Another advantage is that it is easier to get qualified for a 40 year mortgage if you have bad credit. If you are in this situation, this type of mortgage may be your best option. Because banks make more money on a 40 year mortgage, they are willing to take a little more risk. People with credit scores as low as 500 can often get qualified for a mortgage if they are willing to finance the home over 40 years instead of 30. This makes 40 year mortgages great mortgages for bad credit.
Disadvantages of a 40 Year Mortgage
When you get a 40 year mortgage to finance your home, it will take you ten years longer to pay off the debt. This may not be a problem if you are young, but if you plan to retire within the next 40 years you could find yourself unable to do so because you must keep working to pay your mortgage payment. Buying a home this way can limit your options for retirement.
Another disadvantage is that the savings is not as much as you might expect. For example, if you are getting a $250,000 mortgage at 6.5% interest, the payment will be $1580.17 for a 30 year mortgage. You might expect a significant savings by stretching the loan out for an extra ten years, but you really only save a little over $100 per month. The payment on a $250,000 mortgage at 6.5% for 40 years is $1463.64 per month.
You will also pay a lot more interest on a 40 year mortgage. Let's stick with the same example as above. If you pay back the mortgage over a 30 year period, you will end up paying a total of $318,861.22 in interest over the life of the loan. If you stretch it out to 40 years, you will pay $452,548.17 in interest. That means it costs you $133,686.95 to save a little over $100 per month on your mortgage payment.
If you decide to go ahead and apply for a 40 year mortgage, make sure you read the agreement thoroughly before you sign it. In many cases, lenders are inserting balloon payment clauses into their 40 year mortgages. That means that your loan will come due in full at some point before the full 40 years is past. For example, a lender might put in a clause stating the the loan balance becomes due in 30 years. If you are unable to refinance at that point, you could lose your home even if you have paid every payment on time. Be very cautious about entering any mortgage agreement that contains a balloon payment.
Should You Get a 40 Year Mortgage?
One circumstance in which you may find it beneficial to finance your home with a 40 year mortgage is if you do not plan on living in the home for more than a few years. Regardless of whether you are paying your loan off in 30 years or 40, you will be paying mostly interest during the first few years. If you plan to sell in a few years, the difference in the amount of equity you build up in the house during that time may not be that much. You should do your own comparison using the actual loan amount and interest rate before making a decision.
Only you can decide which type of mortgage is best for you. If you do decide to get a 40 year mortgage, it is a good idea to pay extra on the principal whenever you can in order to get the loan paid off early. This will help you save money on interest and reduce the time that you will be paying on the loan.