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Pros And Cons Of A 40 Year Mortgage

Pros And Cons Of A 40 Year Mortgage

Home buying can be a very complicated process with many different factors at play both financially and emotionally. Whether buying a previously owned home or a new home from a builder, a home buyer must consider items like location relative school, work and entertainment such as restaurants and shopping. You must also take into account how long you will live there and whether or not you will be starting a family or downsizing. Do you get a one story or two story home? How much of a down payment are you going to make when purchasing your home? Are you only going to stay in the home for a few years or for a few decades? One of the primary questions relates to what type of mortgage you select to handle financing of the home purchase. Do you get an adjustable rate mortgage or interest free loan? Do you get an FHA, VA or conventional mortgage? And finally, do you select a 15 year, 30 year or 40 year mortgage?

Pros

Selecting a 40 year mortgage is a smart financial decision for few specific groups of individuals. The first group is real estate investors who want the absolute minimum monthly payment and can then charge a higher amount for rent. Depending on market saturation, a landlord may need to lower the price of rent to attract tenants and cannot afford to charge less than the monthly mortgage payment. Another group is short timers who don't care about the majority of their monthly mortgage payment being applied to interest. They may only be in the home for a few years and are saving money for a move or will rent the residence upon relocation. A 40 year mortgage creates incredibly low monthly payments which frees up financial resources to purchase vehicles, build up savings or contribute to retirement accounts.

Cons

The biggest drawback to a 40 year mortgage is if a home buyer makes the full 480 payments they will pay an absolutely exorbitant amount in mortgage interest. Mortgages are unlike any other types of loans where the majority of interest is collected on the front half of the loan and the majority of principle is collected in the second half. So a worst-case scenario would be to pay 10 or 15 years on a 40 year mortgage and then sell. The homeowner will have built next to no equity and paid tens of thousands of dollars in interest. It is always recommended to get the shortest loan term possible, ideally 15 years, if a home buyer can afford it without jeopardizing their financial security. Another drawback is that longer mortgage terms have higher interest rates. The difference between a 15 year and 30 year mortgage can be as much as a 1% to 1.5% difference for the Annual Percentage Rate. Couple that with the longer-term and a home buyer could pay $100,000 or more in mortgage interest.

Summary

There are pros and cons to every mortgage and as a home buyer you have to decide where the benefit lies and if it outweighs the possible downfalls. A 40 year mortgage can allow a family to buy more home than they would've been able to afford otherwise but it also means they will be paying significantly more in interest. As with any financial decision it is important to weigh the benefits and costs to arrive at a solution which works for you in both the short term and long run.

Image by: Jon Matthies