40 Year Mortgage?

Home

6/6/2005, 7:08 pm

FannieMae announced it is extending the maximum loan term from 30 to 40 years effective June 1, 2005. The 40 year term will be available on Fixed-Rate Mortgages and on Hybrid Adjustable-Rate Mortgages. Learn more information about FannieMae 40-Year Mortgage Solutions.

So how does a 40 year mortgage compare to a 30 year? The savings in monthly payments isn’t enough to be exciting and the difference in the total paid is large enough to make one think twice.

Let’s start with the typical 30 year, fixed rate mortgage scenario.

If you borrow $250,000 for 30 years at 5.75%, your monthly payment of principal and interest will be $1,458.93. Over the 30 years of your mortgage loan, you will repay the $250,000 principal and $275,215.57 in interest payments for a total of $525,215.57.

Now, consider the 40 year fixed rate mortgage.

Borrow the same $250,000 for 40 years at 6% and your monthly payment of principal and interest will be $1,375.53. You will save $83.40 per month for 30 years for a total saving during the first 30 years of your 40 year mortgage of $30,024. It sounds good, but remember, this is a 40 year mortgage. You still have 10 years remaining.

Over the 40 years of your mortgage you will repay the $250,000 principal and will pay a total of $410,256.37 in interest payments for a total of (catch your breath) $660,256.37!

In other words, at the beginning of the 31st year, you will still owe $165,063.60.

So what’s so appealing about a 40 year mortgage? Lower monthly payments. In the same way that a 30 year mortgage makes it easier for home buyers to purchase a home than a 20 year mortgage, a 40 year mortgage makes a new home more affordable than a 30 year.

Those last ten years, though … Ouch!

(Where did all these numbers come from? Real Estate Calculator Suite, of course.

Share This Post ...