40 Year Mortgages: An Alternative to Interest Loans?

Interest-only loans are quickly becoming a major credit product. Borrowers who were initially rejected-off by the perceived risk associated with an “interest only” loans are beginning to see the benefits: Lower payments, less money invested in equity, flexibility, etc.

For the borrower intelligent, an “interest only” loan can be an important component of an overall financial plan – allowing them to divert capital payments to other financial goals.

“Interest only” is usually an option only available in adjustable rate mortgages (although some lenders are offering this option to 30 years fixed loans). Borrowers who plan to keep the loan over a long period of time and are uncomfortable with a loan product that has an adjustable-rate component, you may be interested in fixed rate mortgage to 40 years.

(Note: Some lenders offer a 40-year adjustable rate mortgages)

The more flexible underwriting guidelines of a 40-year mortgage may also attract some borrowers who are interested, but do not qualify for an interest only loan.

A mortgage of 40 years is exactly as it sounds – a mortgage that becomes payable within 40 years. Due to a longer repayment period, 10 years longer than the standard 30 year mortgage, monthly payments are lower.

Until recently, these loans were hard to find. Fannie Mae announced that it would begin purchasing these loans to lenders which should increase its availability.

Let’s look at the numbers:

For a loan of $ 250,000 with a fixed interest rate of 5.75% and a term of 30 years, the monthly payment would be $ 1458.93, but the borrower could save $ 83.40 a month for taking a 40-year fixed mortgage . Even in a higher interest rate of 6.00%, monthly payments would be only $ 1375.53.

The monthly savings comes with an increase in the general interest:

If a borrower had to maintain the fixed 40 year mortgage for the entire term and make minimum monthly payments, which would pay about $ 135,000 more in interest.

40-year mortgages may be attractive to borrowers uncomfortable with adjustable rate periods or who have difficulty complying with the highest standards of an interest only loan, however, it is important to understand the impact of a period of 40 years will the overall cost of your loan.

As always, it is best to check with your loan professional confidence. They can help you understand your options and determine what type of loan is best for you.