In
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.
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