Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

05/31/2007
What are the pros and cons of a 40 year loan?
I understand that there are 15-year loans and 30-year loans, but I’m starting to hear about 40 [-year] mortgage loans. What are the pros and cons of a 40 year loan?
Gail V. Marquet:
expert info »
I can't think of any positives for a 40 year loan. When amortized [amortization is the repayment of a mortgage loan through monthly installments of principal and interest], the interest will be almost 3 times the original cost of the home. Building equity [an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property] in the home takes much longer, so when it comes time for resale, you are only netting the appreciation in the market value. With the current real estate market, sellers are not seeing the appreciation in their property as they did a few years ago. Lastly, most people don't plan on staying in their home 40 years so they will not be accumulating wealth in this asset as quickly as they would with a 15 year loan.
Michael A. Masiello:
expert info »
The 40 yr mortgage has evolved to allow people to afford
homes they couldn't originally. There are a few concerns, much longer
payment time,10 yrs [more than on a 30-year mortgage]. The good news is the monthly payment is less. I suggest looking at a number of financial website calculators and checking the numbers. I'm sure you'll see you are paying a significant amount more with
the 40 yr option over the time period. [A] Better option [is] less house, less
mortgage over 30 yr's, extra payments ok, or invest them [the payments] outside of the
house. The key is not to become house poor, which in my opinion can happen
easily with a 40 yr mortgage by masking the costs and allowing more monthly
money to be available, which most often gets spent in cost of living areas.
If you'd like more info please contact me.
Lisa A. Arcangeli:
expert info »
Yes, 40 year mortgages are being offered just about everywhere but I
personally haven't seen many home buyers take them. I believe the only
reason for a 40 year mortgage is to reduce the monthly payment to make
owning a home more affordable. Most first time home buyers don't stay
in their first home for much more than 7 years, making the 40 year
expiration a non-issue since the mortgage will be paid off when they
sell the home.

The cons are that most of the 40 year mortgage products are priced a
little higher than the 30 year mortgage (although that may not be the
case everywhere and the 40 year mortgage will eventually be priced the
same as a 30 year across the board.) And remember, the extended loan
term of 40 years compared to 30 years means that as you are paying down
the mortgage with regular monthly payments, the equity is increasing at
a slower rate on a 40 year term. And finally, the difference in the
monthly payment is not substantial. For example, the difference in the
payment on a $200,000 mortgage from 30 to 40 years, assuming both at the
same interest rate of 6.875% is $89 per month.
Shauna L. Roberts:
expert info »
The 40 year mortgage is a good program for someone to be able to get
into a property that [they] would not qualify for otherwise. The payment is
lower because it has a longer term for repayment. The cons to this
program is in some cases a higher interest rate and the amount of
interest that is paid off over a 40 year term is so much higher than
that of a 30 year term.

It would be a good program for someone to get
into a property that expects their income to increase over a period of
time and then be able to refinance [pay off one loan by obtaining another, which is generally done to obtain better loan terms, like a lower interest rate] to a shorter term.
 

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