40 Year Mortgage Q & A  

There has been a great deal of talk lately about the new 40 year mortgages. Fannie Mae’s June 2005 authorization to sell these mortgages means that they will become increasingly mainstream.

Forty year loans promise to become a standard loan product offering from a majority of lenders.

Some potential home-owners hope that the 40 year mortgage will be a magic bullet that substantially brings down mortgage payments and makes housing more affordable.

Unfortunately, the reality is that 40 year mortgages will really only be advantageous in a small number of cases. To see the minor benefit they provide (and the major increase in total interest paid), let’s take a look at some example payment numbers.

In the table below, the loan amounts of $200,000 and $400,000 are shown with the rates, payments, and total interest for both 30 year and 40 year loans. A 40 year mortgage generally has a one-eighth point higher rate (+.125) than the equivalent 30 year mortgage. On a $200,000 loan, the difference in monthly payment is only $78. On a $400,000 loan, the difference in monthly payment is $156.

For borrowers, this means a difference of only 6% of the total monthly mortgage payment. In contrast, the total interest paid over the life of the loan is a whopping 45% more.

As the table clearly shows, only people on the razor’s edge of qualifying for a mortgage loan will benefit from this slightly lower payment. For most financially strained home-buyers, the best option is still an Adjustable Rate Mortgage product which generally begins with a rate up to a percentage point lower than the equivalent fixed rate.

For more information on Adjustable Rate Mortgages or ARMS, click here.