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The Risks with 40 Year Mortgage Loans


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TERMINOLOGY

40 year mortgage loans are a lending tool that is growing in popularity. Those that live in high priced housing markets tend to use these mortgages as a way to reduce their monthly payments. The additional ten years on the mortgage gives you a lower payment because the loan is stretched out over a longer period of time. Using this loan can help you afford to buy a higher-priced home than you could with a traditional mortgage. While it can be a good idea, the borrower can be faced with several disadvantages.

Higher Interest Rate

Although you have an extra ten years to pay off the mortgage, the lender is not going to give you this for free. They want to be compensated for the extra time on the repayment period. More often than not, they ask to be compensated by a higher interest rate. They are allowing an extra ten years in which you could default on the loan. Therefore, this extra risk on their part is not given out for free. Typically rates are one percent higher than standard loan rates.

Little Savings

Although the idea behind 40 year mortgage loans is to give you a smaller monthly payment, the savings is not usually as big as you think. On a typical home, there is about a $100 per month difference between a 30 year and 40 year mortgage. Many times, this isn't quite the amount of savings that you were hoping for every month. This means that you are taking on additional risk and interest in order to get a small amount of monthly savings. This is not always in the best interest of the borrower.

More Than You Can Afford

With a 40 year mortgage, you can often get in over your head. Let's say that your local mortgage broker has a special on a 40 year mortgage and you can't resist. It seems too good to be true, so you go ahead and buy that bigger house that you've always wanted. Then after about five years, you lose your job. Instead of staying in the smaller house with your smaller monthly payment, you are now in the bigger house with a higher payment and loan balance. If you can't find a job that pays as much as the one you had originally, you could be in deep trouble. You risk losing your house and damaging your credit rating.

Larger Loan Balance

With a 40 year loan, the balance at the end of the 40 years will be higher than that of a standard loan. In other words, you will pay more for this option. For example, if your balance at the end of a 30 year term is $400,000 it can be $450,000 at the end of a 40 year term. Not only will the interest rate increase the amount that you pay, but the loan term itself will lend itself to higher rates.