If you’re considering refinancing you might be tempted by the payment that comes with 40 year mortgage rates. Spreading your home loan payments out over 40 years instead of 30 will get you lower payments; however, is it worth paying the lender for an extra ten years of interest? Here are the pros and cons of 40 year mortgage rates to help you make an informed decision for your next home loan.
40 Year Mortgage Rates
Are there any advantages to choosing 40 year mortgage rates for your next home loan?
Many lenders are offering longer term lengths as an alternative to the traditional 30-year mortgage. Are these home loans a good idea or is choosing too long of a term length a mistake?
40 Year Mortgage Rates Review
The majority of homeowners in the United States choose 30 year mortgage rates without giving a second thought. That includes adjustable rate mortgages like the popular 5/1 and 7/1 hybrid ARMs. You might be asking yourself “why would anyone drag out their home loan for 40 years?” By choosing 40 year mortgage rates for your next home loan your amortization schedule is based on 40 years instead of 30 resulting in lower payments.
Here’s an example to illustrate how lengthening the term gets you a lower payment amount:
Suppose you’re refinancing your home for $300,000. Based on your financial details you qualify for 30 year mortgage rates at 3.9 percent which gets you a payment of $1,410 per month. If you were to choose 40 year mortgage rates you’d qualify for 4.3 percent and a monthly payment of $1,300.
That’s a (perceived) savings of $110 per month. It’s worth noting that interest rates of this type are slightly higher than traditional 30 year refinance rates. Longer term lengths pose higher risk for lenders and therefor come with higher interest rates. Some borrowers might find they qualify for this type of home loan and not 30 year based on their debt-to-income ratio.
Disadvantages of 40 Year Mortgage Rates
Having a lower payment is all fine and dandy but what’s the down side of choosing this type of home loan? Your monthly payment might be lower ($110 per month in our example), the amount of interest you’re paying over the duration of your home loan is astronomical.
Another downside is that because your amortization schedule is spread out over 40 years instead of 30, you’re building equity in your home at a much slower rate. In an economy that’s seeing declining home values you could find yourself underwater. (Meaning you owe more than your home is worth which could make it very difficult to refinance later.)
Should you choose 40 year mortgage rates for your next home loan? I would recommend this type of loan only as a last resort if no other options are available for you. If you’re considering mortgage refinancing with 40 year mortgage rates you’ll never recoup your out-of-pocket expenses paid at closing making this type of home loan a losing proposition from day one.
You can learn more about avoiding common mortgage mistakes and getting the best deal on your next home loan by checking out my free Underground Mortgage Videos.