A mortgage in which the repayment of principal is done over a 40-year period, rather than the traditional 30-year period, in order to reduce the monthly payments. The rate on a 40-year mortgage can be fixed or adjustable.While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest. Furthermore, a small tweaking in the 30-year mortgage would accomplish the same thing, maybe better.
40 year mortgages are increasingly popular with customers who are refinancing their home mortgage as part of a debt consolidation strategy, allowing them to borrow marginally more money, eliminating high revolving debt payments, while still maintaining a payment which is similar to what they were paying before on their 30 year mortgage payment.
40 year mortgages are becoming more popular as homeowners are constantly looking for more affordable ways to own homes.
Other alternatives to the 40 year mortgage are option arms, interest only arms, and interest only fixed mortgages. Ask which one is right for you.
In many cases the 40 year amortized loan will have a better rate than an interest only payment. If the 40 year payment is just slightly higher than the interest only payment, opt for the 40 year payment because you will be paying down some principal.
The 40-Year Mortgage allows for principal reduction but at a significant lower payment to borrower. The difference in payments can be pretty significant. For example, on a $500,000 mortgage financed over 30 years at a fixed rate of 5.875% costs $2957.69 a month. But the monthly principle and interest payment drops $2707.63 on a 40-year schedule. That is over $250 less in your monthly payment.
One of the disadvantages of a 40 year loan is that the homeowner builds equity at a much slower pace. For first-time buyers counting on equity accumulation to eventually move up to another, larger and more expensive home, this slower pace of equity accumulation is a liability and may leave some people sadly disappointed.
The 40-year mortgage is more attractive than interest-only loans because borrowers build equity in their homes, albeit at a sluggish pace, and they are not vulnerable to rising interest rates.
You should ask your mortgage broker whether or not this loan makes sense for your situation. A professional will be able to provide loan programs that he or she thinks is of the most benefit to you. Remember though that this is your mortgage, and you have final say. If you are absolutely sure that a 40 year mortgage is for you, then your broker should be glad to help you get it.
For renters who cannot afford a 30-year mortgage and still want to own their own homes, a 40-year amortization mortgage is often a good solution. In many metropolitan areas, the average rental cost for a single family residence is about the same as the monthly payments of a 40-year amortization mortgage with conforming loan amounts. Renters in these areas can often afford their own homes after all. However slow homeowners with 40-year mortgages build equity, they do contribute to the equity of their own home nonetheless.
If you run the numbers using a mortgage calculator you will be able to see the benefits of homeownership vs. renting and it may make sense to acquire a 40 year amortization loan. It is much better than throwing your money away on rent each and every month.
While fixed-rate mortgages remain attractive by historical standards, borrowers looking to keep their monthly payments down are running out of good choices. Some borrowers may consider products such as option ARMs and interest-only mortgages.
The shinning feature of a 40-year fixed-rate mortgage is that monthly payments are more affordable without taking on the risk of an ARM. This is of particular interest to buyers in high-cost areas. The 40-year fixed mortgage may also appeal to buyers with small down payments. The monthly payments on large loan amounts are accomplished by spreading amortization (the repayment term) by an extra 10 years.
However, before you begin to think that this is the greatest loan ever, keep in mind the difference in payments may not be as much as you think. Be sure to have your loan professional run the numbers for you and compare with other loan products.
One twist to the 40 Year mortgage that you may want to watch out for is a 40 year due in 30, What this means is you will have a balloon payment due at the end of 30 years. This is not a bad thing considering most homeowners will most likely refinance before 30 years.
