40 year fixed versus 30 year fixed mortgage loan
40 year fixed versus 30 year fixed mortgage loan - A 40 year fixed mortgage is a just like any typical conventional mortgage loan except that you pay it off over 40 years instead of the common 15 or 30 year amortization found in the past. The additional 10 years of amortization lowers your overall payment each month.
If you are looking for the lowest possible mortgage payment, while paying down your principal, then the 40 year fixed rate mortgage may be the way to go. Also, if you are attempting to become qualified for a mortgage but your debt to income ratio is a little too high, then you may need to use the 40 year fixed mortgage to get you into the home. The lower payments may be just enough to help you qualify for your new mortgage.
Even if you take out a 40 year mortgage you still have the option to pay a little extra each month, or whenever you have extra money to pay down the mortgage quicker. Paying just a little extra per month can help pay down the mortgage much faster than you otherwise would because the entire excess payment is applied against your principal.
A 40 year mortgage is a nice option when you are looking for a low monthly payment and a little more flexibility is needed. Ask to see a breakdown of what the total costs and payments of a 30 year mortgage would be versus a 40 year mortgage to make sure that there is enough of a difference in your monthly payment to make it make sense to you. Sometimes, there may only be a very slight difference in the payments and it may not make sense to finance your home loan for 10 more years for very little to no savings.
Today there are new mortgage programs that combine the low payment of an interest only loan with the security of a fixed interest rate. One popular option is 10/30 Fixed Rate Interest Only mortgage. This particular forty year loan offers a 10 year interest only period which means a lower payment, but no reduction of principle. After the 10 year interest only period the loan becomes your standard 30 year fixed mortgage. This may be useful if you plan on staying in your home a while and anticipate pay raises to cover the higher fully amortized payment.
A variation of the 40-Year Fixed Rate mortgage, the 40/30, is being offered by many banks. The 40/30 is a home loan amortized to be paid off in 40 years, but is due in 30 years. In other words, even though payment is calculated as a 40 year loan, at the end of the 30th year, the entire loan balance becomes due. The "40 Due in 30" is ideal for younger home buyers who just started their careers and have no short term plan to move.
Pros and Cons Of A 40, 45 or 50 year Loan - You may have heard that there are now 40, 45, and even 50 year mortgages being offered by some lenders. While some are happy to see the lower payments that these loans offer, others quickly dismiss them due to how long it will take someone to payoff the mortgage completely. If you are considering this type of loan here are the pros and cons to a longer amortization term.
These 40, 45 and 50 year mortgages are easier to qualify for than interest only loans. So depending on your credit situation it may be the best solution for you and you're paying down some of the principle every month.
To save a very minimal amount of money and add 10 or possibly even 20 more years to your mortgage does not make a lot of sense most of the time. On a 100,000 mortgage at 7% interest for 30 years your principal and interest payment would be $665/month. On that same 100,000 mortgage at 7% for 40 years, your principal and interest payment would be $621/month (a savings of $44/month for an extra 10 years of payments). On the same 100,000 mortgage, again at 7% for 50 years, your principal and interest payment would be $601/month (a savings of $64/month for an extra 20 years of payments). Adding an extra 10 years of payments based on the aforementioned numbers would add and extra $74,520 worth of payments to your mortgage for a whopping $44/month savings. Therefore, the savings are not nearly as grand as one might think by stretching your mortgage term out for an extra 10 or 20 years. However, sometimes the longer term may be necessary in order for you to qualify for the mortgage loan due to debt to income ratio restrictions and due to other reasons as well. Consult your mortgage professional to find out if a 40 or 50 year loan might be right for you.
The era of a homeowner sticking to their housepayments for 30 years and paying the house off completely is all but dead. Homeowners refinance every 3-5 years. Sometimes its for cash out and sometimes its for a lower term on the mortgage. So taking a 40 or 50 year term isn't all that bad. It is one way to reduce your payments and accomplish the objectives of the loan. Just keep in mind that you will probably refinance again to reduce your term.
Many renters prefer mortgages with longer loan terms because the monthly payments are not much more than the rent they otherwise pay. In states where the closing costs to refinance are high, many do not intend to refinance their loans once they move in to their homes. In this case, 50 year mortgage may be a prudent choice.
Mortgages with loan terms such as the 40, 45 and 50 year mortgage make home ownership easier to qualify for. First time homebuyers will be able to afford a bigger house or get a lower payment due to the longer payment schedule. Lenders favor these mortgage types over interest only loans because the principle balance of the mortgage is getting paid down. The 40 year fixed mortgage is a good option for those that do not plan to move out or refinance their property.
A benefit of a 50 year loan, compared to an Interest Only loan is that payment is fixed on a 50 year loan compared to an interest only loan which is fixed for 1,3,5,7 or 10 years.
With a 50 year loan you get the benefits of a payment similar to an interest only, but get pay of a little of the principle with every payment.