New 40 Year Mortgage Lowers House Payments
Mortgage companies will expand the availability of 40 year fixed- rate home mortgages in 2006. 40 year loans are already catching on in California and other areas with high home prices. In 2005, 25% of all new loans in California were 40 year mortgages versus the traditional 30 year loan term.
The 40 year mortgage does carry a slightly higher interest rate than a 30 year loan. But, stretching the loan term lowers the monthly house payment. The reduction in payment can mean the difference between renting and buying for lower income families, or in areas with expensive home prices.
For example, on a $400,000 loan at 6%, the borrower’s monthly payment will be $200 less per month for 40 years, than it would be for the traditional 30 year loan. Although less money goes toward paying off the house, most homeowners never pay off a house, anyway. In the U.S. the average homeowner will sell or refinance their home every seven years.
In my opinion, stretching the fixed rate loan term to 40 years is less risky than most Adjustable Rate Mortgages (ARM’s). ARM payments go up as interest rates rise and many have no ceiling on how high your payment can go. ARM’s can spell sticker shock, or worst case, families may face an increase in their payment that exceeds what they can afford.
While 40 year loans may not be for everyone, the product is a safer for those who can not qualify or afford a 30 year fixed rate mortgage. With the 40 year mortgage, at least the loan is fixed and the payment will not change for as long as you need it. If you feel that a 40 year mortgage would be better or safer alternative for you, talk to the lenders and make an informed decision.