A home mortgage is a type of loan that is used to purchase a property. Typically, a mortgage is paid off over a period of 15 or 30 years. However, the Federal Housing Administration (FHA) has recently proposed adding a 40-year mortgage to their list of loan options. In this blog post, we will explore the pros and cons of a 40-year mortgage.
Pros of a 40-Year Mortgage
Lower Monthly Payments
One of the biggest advantages of a 40-year mortgage is that it will lower your monthly payments. Because the loan term is longer, the amount you owe each month will be lower than if you had a 30-year mortgage. This can be especially helpful if you are on a tight budget and need to keep your monthly expenses low.
For example, the average price of a home in the United States as of the writing of this post is $468,000. For a 30 year mortgage at a 6% interest rate with a 20% down payment, you can expect a monthly loan payment of roughly $2,245. For a 40 year mortgage with the same parameters, your monthly loan payment drops to $2,060 - a monthly savings of $185.
Increased Affordability
A longer loan term also means that you may be able to afford a more expensive home. If you are struggling to qualify for a 30-year mortgage, a 40-year mortgage may be a better option for you.
More Flexibility
A 40-year mortgage can also provide more flexibility for borrowers. With a lower monthly payment, you may have more money available each month to cover other expenses or save for the future. Additionally, some lenders may offer the option to make extra payments or pay off the loan early without penalty.
Cons of a 40-Year Mortgage
More Interest Paid
Because the loan term is longer, you will end up paying more in interest over the life of the loan. This means that your overall cost of borrowing will be higher than if you had a 30-year mortgage.
Let’s take the same example above for a $468,000 home with a 20% down payment borrowing at 6% interest. The amount of interest you can expect to pay over the life of the loan, assuming you pay equal monthly payments, is:
30 year mortgage: $433,698
40 year mortgage: $614,400
The extra 10 years of payments cost you $180,702. That is quite significant and would be much higher if you choose to purchase a more expensive home.
Slower Equity Growth
With a longer loan term, you will build equity in your home at a slower rate. This is because more of your monthly payments will go towards interest instead of paying down the principal balance.
Potential for Negative Equity
A 40-year mortgage may also put you at risk for negative equity. This is when the amount you owe on your mortgage is more than the value of your home. This can happen if the value of your home decreases or if you take out a larger loan than you can afford.
Summary
In conclusion, a 40-year mortgage can be a good option for some borrowers who are looking for lower monthly payments and increased affordability. However, it is important to weigh the pros and cons carefully before making a decision.
Ultimately, the best mortgage option will depend on your individual financial situation and long-term goals.