What are your thoughts on a 40 year Mortgage?

Question

Out of all of the "creative" lending products, this one seems to make the most sense for someone looking to upgrade in the buyers market.

Just honest opinions, perferably from people that have taken out these kind of loans . No spammer answers! I am not interested in buying anything from you.

Thanks

Answer 1

I'm finally coming around to the 40 year fixed rate loan, as offered by Fannie Mae and Freddie Mac. A little.

It does offer some payment savings. Not much, however, and it is reduced to a degree by the higher rate charged on 40 year loans, as compared to a 30 year fixed.

In most cases, you can get a 30 year fixed interest-only loan for the same rate as a 40 year fully amortizing fixed rate loan. The 30 year is interest-only for the first 10 years. After that, you have a big payment jump. But, 10 years is far longer than 99% of loans are in existence. So the real impact of this is negligible.

At least on the 40 year, you are making some dent in your principal balance, though it is really quite minimal.

Example: $200,000 loan. 6.25% both for 30 fixed interest-only, and 40 year fully amortizing.

$1041/mo. interest-only
$1135/mo. 40 year

Balance after 5 years:

$200,000 interest-only
$193,412 40 year

$6,588 difference in balance
$5640 difference in payments accounting for that spread

In theory, you could invest the difference in payments into a 5% savings account (not hard to find right now), and have $6392 in cash.

All in all, assuming rates are the same, the interest-only would provide more payment savings.

But, the most telling comparison is this: 30 fixed, fully amortizing, 6.00% (yes, it would be about .25% lower with most lenders). That payment is only $1199.

So, adding an extra 10 years to your term, and jacking your rate up .25%, you only save $64 per month. However, because of the longer term, you are shorting yourself on principal reduction.

The 30 fixed fully amortizing loan would have a balance after 5 years of only $186,108. Paying the extra $64/mo. gets you an additional $7304 in principal reduction, and only costs you $3840 more in payments.

So, it's not great, it's not bad. I'd rather see my clients suck it up and take a straight 30 year fixed, fully amortizing loan. But, I'm not the one who has to cut that check every month either, so all I can really do is show my clients the reality of the different options over their expected time in the home, and let them make the decision they're most comfortable with.

I wholeheartedly disagree with a 40 or 50 year subprime ARM loan though. Those are typically 2-3 year fixed-rate loans, becoming adjustable afterwards, with a balloon payment at the end of 30 years. For those, the rate hike is bigger, eats up almost all the savings, and simply just lets the lender earn more while you go backwards.

Answer 2

I realize that people are in different situations. Like already said, 40 years is a very long time. But, these are offered through legitmate lenders. If you were to do this, I think that it is important to get in the habit of adding a specific amount of extra principal every month. There are some great financial calculators out there to help you see how this will save you alot of additional interest and years of the mortgage.

Remember, if you have a 30 year mortgage and make an additional principal payment every year, that 30 year becomes a 21 year note.

Answer 3

A 40 year mortgage is ridiculous.

I have had three 30 years mortgages, and now have a 15 year mortgage. The different in payments between 30 and 40 years is not significant, per table table below:

$100,000 at 10 years monthly payment = $1,100
$100,000 at 15 years monthly payment = $844
$100,000 at 20 years monthly payment = $716
$100,000 at 25 years monthly payment = $644
$100,000 at 30 years monthly payment = $600
$100,000 at 40 years monthly payment = $550
$100,000 at 50 years monthly payment = $526

You may notice a pattern here. Mathematically, as years increase, you approach an "asymptote" where payments decrease very little as you extend the duration of the loan further and further.

These were calculated with the mortgage payment calculator at:

http://www.forsalebyownercenter.com/tools/mortgage-calculator.aspx


The natural break points in mortgage duration are 10 years, 15 years, 20 years, and 30 years.


Unless you plan on staying in a home five years, you won't recover closing costs, and would have been better off renting.

Other real estate strategies, especially in cities, depend on other factors, such as insider knowledge of development, zoning variances, building codes, general shortage of housing, etc. and that is where all these "creative" financing schemes suddenly can be attractive.


Real estate transactions fall into the realm of "one time" deals, where the urge to cheat by either party is basically overwhelming. The theory of one time deals, also known as the "prisoner's dilemma", or "tit for tat", have been thoroughly modeled by game theorists with their computers to determine the best strategy.


I say this having done well over the years, and am now in my "dream" house that I will have paid off in a few years.

But seeing how many people got screwed in real estate and the losses they suffered ... let's just say the difference between real estate and the slot machines in Las Vegas, is that I can't mathematically prove you will lose in real estate. Otherwise you are throwing the dice either way.

Answer 4

The 40 year mortgage does seem like a long time, but I think it would be a good option for people depending on their situation. If you're younger it might be good for you since you don't have to push yourself as much for the payments and people's life expectancies are longer nowadays; they have a better chance to live longer and pay off their house in the end.The 30 year mortgage is already long as it is, and I personally don't know anyone who has ever paid off their house yet. I figure, why not help out your wallet and stretch it out for another 10 years. The payments will be less each month and yes, you are paying more interest, but you're already paying a bunch of interest as it is on a 30 year mortgage.

Answer 5

I just recently bought my first house a year ago, and i think a 40 year loan would be more manageable because of the reduced payments, however, the interest would be a whole lot more-i have a 30 year, and the interest alone for one year was almost 6 thousand

Woah, see im not a jackass after all

Answer 6

We have a 40 year mortgage. In this day and age, when people don't tend to stay in their homes long term, it's not as big of a deal. If you are in a market where you know you will make money when you sell, it's a good way to keep your mortgage payment down to a reasonable amount.

Answer 7

40 years seems like a long time unless you can add principal to your payments to pay it off quicker. Think how old you'll be when the house is paid off, and when you might want to retire. My advice is to finance for as short a period as possible and still afford the payment, or at the very least add principal to each payment. If that's the only way you can afford to go though, there's nothing wrong with it. If rates drop later or your financial situation changes, you can always refinance later.

Answer 8

Good way to keep the payments low, just make sure they don't use it to jack up the interest too much.
If you stay there a long time, you can always start doubling up on payments if you can, and shorten the period of the payoff.
Also, most homes get sold in 6 to 7 years.

Answer 9

Well it is not a problem, as your income goes up you can pay it off faster, in addition if your property value increases you can sell your house and pay off the loan.

Just watch any deal that sounds too good to be true.

Answer 10

that's a long long time,,