Forty-Year Mortgages
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

The Hensler Financial Group Wealth ManagementIn the last couple of years a new mortgage has surfaced: the 40-year mortgage. Not all lenders offer this type of mortgage, but the lenders that do offer one often structure the mortgage in different ways. Some lenders will offer a 40-year fixed mortgage. The interest rate charged on these mortgages is usually more than the interest rates on traditional 15 and 30-year mortgages. Other lenders structure the loans as a 5/1 ARM. This means that during the first five years of the mortgage, the rate is fixed and then for the next 35 years, the rate varies.

While 40-year mortgages have lower monthly payments, these mortgages usually require a larger down payment. The equity in your house will not grow as rapidly as it would with a 30-year mortgage, and you will pay more interest over the life of the mortgage.

If you have already established a regular savings program, a 40-year mortgage could be useful to you. If you saved the difference between a 30-year mortgage and a 40-year mortgage payment every month and invested this difference into equities, you would have an opportunity to recoup the amount you are paying in interest over the life of the loan. For example, the difference in monthly payments for a 30-year versus a 40-year loan on a $250,000 mortgage at 7% is $109.68. This would allow you to invest $1,316.16 per year into equities. Normally, over a 10-year time horizon, stocks have outperformed other types of investments, including residential real estate.

The down side to a 40-year mortgage is that on a $250,000 loan at a 7% interest rate, you will pay $495,000 in interest over the life of the loan. In comparison, you will pay only $348,000 in interest on a 30-year loan. This is assuming you do not make changes to your mortgage over the years. But, if you are in a high-income bracket and intend on staying in your home, the 40-year mortgage could be beneficial if you are able to receive a tax deduction for interest payments. Generally, if you will not save the difference, then you should consider staying with a traditional 15 or 30-year mortgage.

A Comparison of 40-year Mortgages versus 30-year Mortgages

You can borrow more with a 40-year mortgage. For example, if you can afford a monthly payment of $1,750 (excluding taxes and insurance) with a 7% interest rate, the maximum amount you can afford to borrow is $263,000 with a 30-year mortgage. You can borrow up to $281,000 with a 40-year mortgage — that is $18,000 more!

If you do not intend to live in your home for more than five years and the houses in your area are appreciating rapidly, the 40-year 5/1 ARM could benefit you. You get the benefit of the lower monthly payment and appreciated property when the house sells.

Before you make a final decision as to what type of mortgage is right for you, you should contact your financial adviser. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.

 

 
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