Depending upon your financial position there can be both benefits and negative aspects to 40 year mortgage programs. The biggest advantage of a 40 year fixed rate mortgage is the ability to amortize the repayment of the loan’s principal and interest over a 480 month period of time rather than the 360 months that are associated with a 30 year loan. This means that one’s monthly payment will likely be lower than with any fixed rate mortgage program with a shorter amortization schedule. The biggest downside to 40 year home loans is that, due to the longer duration of the loan, consumers will end up paying considerably more in interest over the life of their loans.
While 40 year mortgages remain fairly under the radar when compared to other fixed rate products such as 30 year mortgages, 20 year mortgages, and 15 year home loans, they have attracted some interest especially in markets with higher real estate prices. In certain areas such as the Northeast and coastal California, many homebuyers find themselves in positions where they simply cannot afford the payments associated with other fixed rate mortgage programs. Thus leaving the only viable options either a 40 year mortgage or an adjustable rate product. There are plenty of people out there who have either been burned by ARM products in the past or know someone who has. This leads us to another potential reason to consider a 40 year mortgage. If people are only planning on being in their properties for a short period of time, say 3-5 years, but are concerned about taking out adjustable rate loans, then 40 year home loans might be a decent option to consider. Due to how loans are front loaded with higher portions of monthly payments being applied to interest during the first few years of a loan, there is not a huge amount of principal reduction.
With all of that being said, the flip side argument for 40 year mortgages is that consumers could essentially be overextending themselves by borrowing on a home that maybe they cannot truly afford without this type of financial instrument. And, this instrument can equate to a considerably higher amount of interest over the life of a loan while principal reduction takes longer than with a 30 year mortgage.
It may not come as a surprise that few homeowners actually take out 30 or 40 year mortgages with the intention of remaining in their homes for 30 to 40 years. Some studies have shown that the average US home homeowner sells his or her home in an average 7 to 10 years. If someone is considering taking out a 40 year mortgage, it would likely be in their best interest to do a little bit of math and analysis to see what the difference in interest payments and principal reduction is between the various programs to ensure that they are making a well education decision. Also, consumers should consult a licensed mortgage professional before electing a mortgage program.
