Is a 40-Year Mortgage Right for You?
30 years or 15 years. Those are your options for a mortgage.
While most people are familiar with either 30 or 15-year mortgage terms, there are actually mortgages available that are based on many different lengths. 10-year, 20-year, and 25-year mortgage terms are available if you want them.
In fact, you can even have a mortgage that has 40-year mortgage terms. That’s right, if the numbers are right for you, you can get a mortgage that brings terms of 40 years, allowing you to maximize cash flow while still generating equity in the home.
40-year mortgages, of course, are not for everyone. They have distinct advantages as well as disadvantages, and like all things in home ownership and financing, you need to be fully informed on the specifics to make the right decision for your financial future and home-ownership goals.
Let’s look a little closer at the details of a 40-year mortgage term to see if it may be right for you…
Understanding the Specifics of a 40-Year Mortgage Term
The 40-Year Mortgage: A Briefing
A lot of things in real estate and mortgages can be a little complex. The concept of a 40-year mortgage, however, is quite basic.
It simply means that you will be extending the mortgages loan, plus interest, to a 40-year term. Virtually everything else is still the same; you still make monthly payments and the loan still generates interest. Most mortgages are either 15 or 30-years, but this type of mortgage lasts longer, which brings some obvious advantages and a few downsides.
40-Year Mortgage: A Look at the Numbers
Calculating numbers on a mortgage can be tricky. There are many variables, including the loan total, interest rates, payment terms, and even the value of the property that can influence the final numbers. However, we’ll try to keep it as simple as possible to give you a basic idea of the differences between a 15-year, 30-year, and 40-year mortgage loan.
To calculate these numbers and give you a basic comparison, we simply used Bankrate’s Loan Calculator platform. We stayed with an interest rate of 4%, which is roughly a typical interest rate for a 30-year fixed-rate mortgage. (It may be high for many mortgages.) Remember, the numbers will change for each type of loan (for example, 15-year mortgages often have lower interest rates), but again, we’re trying to keep it as simply as possible and we only change the payment terms. For simplicity, we also used a total mortgage loan of $300,000 with no down payment.
Here’s the numbers for a $300,000 mortgage loan with 4% interest:
- Monthly payments: $2,219.06
- Total cost of loan: $399,431.48 ($300,000 + interest)
- Monthly payments: $1,432.25
- Total cost of loan: $515,608.52
- Monthly payments: $1,253.82
- Total cost of loan: $601,831.40
This is a simplified example that is only used to show basic differences; it should not be considered an official price. For specifics and official quotes on payment plans and total cost, please contact San Diego Purchase Loans.
As you can see, there are some clear differences that come from simply adjusting the loan terms. And these differences can have a significant impact on both your short and long-term financial planning.
Advantages of a 40-Year Mortgage Term
The obvious advantage of using a 40-year mortgage term is lower monthly payments. As you can see from the example above, the monthly payment dropped roughly $1,000 from the 15-year to the 40-year, freeing up a sizable amount of money that can be used for investments, improving the home, or simply enhancing your lifestyle. Affordability is a major attraction for the 40-year mortgage, as it frees up a lot of your monthly income.
The lower payments can also mean a lower debt-to-income ratio, as this number is usually calculated by comparing your monthly payments (not the total you owe) to your monthly income. A lower DTI ratio can potentially bring better terms for other financing situations, such as car loans.
Disadvantages of a 40-Year Mortgage Term
If you’re going to consider a 40-year mortgage, you need to understand the total cost. Because the payment terms are extended for a longer period, the interest rate has more chances to accumulate and grow. In the end, this means the total amount you pay to the bank will be higher.
The total amount of money you pay on interest will be higher as you extend the terms:
- 15 year: Roughly $99,000 in total interest
- 30 year: Roughly $215,000
- 40 year: Roughly $301,000
(Total interest = Total cost – $300,000)
It doesn’t take a math major to see that the total cost of borrowing money out to 40 years is more costly in the long run.
Also, the longer terms mean you will be tied up to paying the loan for a longer period. If you can afford the 15-year mortgage, once the payments are made, you’re free and clear. You now own a home with no payments going to the bank. Imagine how much you could enjoy, invest, and give if you had no mortgage payments! The 40-year mortgage, however, doesn’t allow this opportunity, at least not any time soon.
If you take out a 40-year mortgage when you are 25, you’ll be making payments until you are 65. If you have a 15-year mortgage, you could own the home outright when you are 40. This sets you up for significant long-term financial stability.
Providing the Right Information on 40-Year Mortgage Terms
No matter what decision you make, be sure to talk with a qualified professional. Contact San Diego Purchase loans and we’ll help you see if a 40-year mortgage would be right for you and your family.
While this type of mortgage is not right for all, it may fit your specific circumstances, so talk with an experienced professional today!