Is the 40-Year Mortgage Really An Answer to Debt Relief
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 MortgageGrader.com, Jeff Lazerson, stated that the 40-year mortgage “is a joke.” He added, “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.” Typically, these types of loans come with higher interest rates, and over the course of four decades, the consumer will end up paying much more in interest than a 30-year mortgage holder would.
To see how a 40-year mortgage weighs against a 30-year mortgage, here is an example. If a consumer borrowed $100,000.00 at 5% with a 30-year mortgage, their monthly payment would be approximately $540. Borrowing at the same rate, but for a 40-year mortgage would bring their monthly payment down 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. So, looking at the above example with a 5.25% interest rate on the 40-year mortgage, it now brings the payments to $499 a month. That still would bring a savings of $37 a month as opposed to 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.
|Loan Amount||Interest rate||Loan Terms (Years)||Monthly Payments||Total Payments over Lifetime of the Loan|
In the end, the 40 year mortgage at 5.25% means an additional $46,560 in payments. That’s a significant amount considering the monthly savings was only $37. Is having an extra $37 to put towards debt relief important enough to lose almost $50,000 in the end?
There is a small percentage of people who would opt for the 40-year mortgage. These are the consumers who are not particularly sensitive to the time of the loan, and want the smallest monthly payment they can possible find. 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.” Making extra payments to pay off the loan can quickly help consumers dramatically. 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.”
For consumers looking for monthly debt relief, the 40-year loan may be a viable answer. As long as they understand that their total payments, if they stick to the actual loan structure, will be significantly higher in the end than a 30-year mortgage. If a consumer is looking to sign up for a 40-year mortgage, they should understand the terms and conditions, and then choose wisely.