A look at the costs and benefits associated with obtaining a 40-year mortgage loan.
As with any loan option, a 40-year mortgage has both its up and down sides. While there are many reasons that a loan of this length might be desirable, there are also reasons why obtaining a loan for this long might not be the best idea for some people. All of the factors involved with a 40-year loan should be carefully considered before choosing this mortgage option.
As most homeowners know, the length of their mortgage loan has a significant impact on the amount of their monthly payment. Homeowners choosing to pay back the loan quickly will find that they are paying a higher amount each month. Those choosing to take more years to repay the money will be able to enjoy lower monthly payments. Therefore, homeowners choosing a 40-year term on their mortgage will be able to enjoy lower monthly payments than if they had borrowed the same amount of money for 15, 20, or 30 years. This can be important to those families on a tight budget, or those wanting to purchase a larger, more extravagant home. For instance, if a family finds a home that they want to purchase, however the payments on a 30-year mortgage are going to be a little higher than they would like, the family might choose to borrow the money for 40 years instead. This could lower the monthly payments by enough that they are able to afford to purchase the home. This could also allow a family to be able to afford the payments on a larger amount of money, enabling them to purchase a more expensive home than they would be able to afford with a traditional 30-year mortgage.
As an example of the difference in monthly payments associated with longer term mortgage loans, let's consider an example. If a family were to borrow $200,000 at 5% interest, they would have several choices in regards to the length of the loans available. If the family chose to repay the mortgage over 15 years, their monthly payments would be approximately $1582 each month, for principal and interest only. This is higher than they would repay on a mortgage with a longer term, since the loan will be repaid in much less time. If the family borrowed the same amount for 30 years, their monthly payments would be $1074. The payments on this amount would only be $964 if the family chose a 40-year mortgage. That is $618 less each month than they would pay on a 15-year mortgage, and $110 less than the payments on a 30-year mortgage. Obviously, this monthly savings would be desirable to many home owners.
However, there is more to consider in choosing the length of a mortgage term than the monthly payments alone. The longer the term is on a mortgage, the more a homeowner can expect to repay in interest over the life of the loan. Even with a great interest rate, this amount can be significant. Let's consider the same example of the $200,000 mortgage at 5% interest. If a homeowner were to borrow this amount over 15 years, he would repay approximately $84,685 in interest alone over the life of the loan. This same amount, if borrowed for 30 years, would cost the homeowner $186,513 in interest by the time the loan is repaid. Since a 40-year mortgage is longer than either of these options, it will obviously require repayment of the most interest. In fact, over 40 years, the homeowner can expect to pay $262,913 in interest alone. That is more than the original amount of the loan. Borrowing the money for 40 years will cost the homeowner $178,228 more than if he had chosen the 15-year mortgage, and $76,400 more than if he had chosen a 30-year mortgage. A careful look to compare the 30 and 40-year mortgages will show that the monthly savings is only a little more than $100, while the difference in the amount of interest that will be repaid is significant.
Obviously, every home owner and every situation is different. While a 40-year mortgage will have advantages for some people, it is important to carefully weigh the benefits and costs associated with any home loan before making a final decision.
