The 40-year Mortgage Analysis with the Mortgage Calculator

In the past five years the mortgage market has seen a slew of new loan products come and go.  One loan product that was first tossed into the fray by sub prime lenders was a 40-year term mortgage.  Now that sub prime is tapering off, this term is being used on mainstream loan products.  The advantage of the 40-year term mortgage is to make the monthly payments smaller and housing more affordable.  While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest.  The mortgage calculator for comparing mortgage terms is set to compare a 15 year term mortgage, a 20 year term mortgage and a 30 year term mortgage; any of these terms can be changed at anytime in the mortgage calculator including the addition of the 40 year term mortgage.

Undeniably, the payment on a 40 year term loan versus that of a 30 year term will be lower and subsequently allow some borrowers who would not normally qualify for a home loan be able to afford one.  However, the effect of extending the term of a mortgage payment is smaller the longer the initial term is set at.  This means that a change from 20-year term to a 30-year term can have a sizeable percentage change in the payment.  The change from a 30-year term to a 40-year term is not nearly the equivalent drop in relative payment amounts.  For example, a 20-year mortgage for $250,000.00 at 6.0% has a principal and interest payment of $1791.08.  If this same loan is placed on a 30 year term the payment drops to $1498.88 or 16%.  This same loan amortized on a 40 year term would have a payment of $1375.53, a reduction $123.35 or only 8%. 

Furthermore, the total payments on a 30-year term mortgage for $250,000.00 at 6% would be $535,595.47.   The added 10 years of the same loan amortized over 40 years yields a total payback of $660,256.37.  This adds $120,660.90 in total charges for a 6% reduction in the payment.  Compare the impact of the payment differences by entering different mortgage terms in the mortgage term comparison calculator.

Lastly, the borrower should factor in different mortgage interest rates.  As a rule, mortgage loans do not last more than three to five years.  Homeowners refinance or sell long before the term is due.  Nonetheless, lenders charge higher rates the longer the term is on a loan.  Fifteen-year term mortgages are about ¼ % lower in rate than a comparable 30-year tem mortgage.  The extension to 40 year leads to roughly the same increase of about a ¼ % from a comparable 30-year term.  Having already calculated that the value of the 40-year term is fairly small, what limited monthly savings did exist is partially eroded with the higher rate.  Borrowers must be aware of the interest rate differences on the term of a loan to appreciate the true value of extending the term on a home loan.  Before entering the loan amount and term in the mortgage payment calculator, be sure to have the current mortgage rates for all terms being compared.

The 40-year mortgage has a practical purpose of allowing a small segment of borrowers the ability to afford a larger loan.  The disadvantage of significantly larger repayment and a slow down in equity build up, almost completely erases the benefit this loan would have for most all borrowers.  Mortgage calculators such as the mortgage term calculator or a mortgage payment calculators can help investigate the value or lack of value found in 40 year term mortgages.

This entry was posted on Friday, December 12th, 2008 at 7:31 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.