The 40 year mortgage is sold to folks who want or need a lower payment. Many home owners are seeking a monthly payment even lower those provided on standard 30 year fixed loans. A 40 year mortgage is less in monthly payment because the loan is amortized over 40 years instead of 30…at least in theory!

Well, you know what I’m going to say….if you can’t afford to buy or refinance because you can’t even afford the 30 year payment, then you should not own a house.

With that said, let’s look at the reasons a 40 year loan is completely insane and just another way for the banks to trick you into giving them more of your money.

First, the rates on 40 year mortgages are about .375% higher. If you were quoted 6.5% for a 30 year fixed, you would be quoted 6.875% for a 40 year mortgage.

Yep…the banks are at it again. They charge you HIGHER rates on the 40 year term…which is counter-productive if you’re seeking to LOWER your payment!

Second, the amount in interest you pay the bank every month is much higher the longer the loan is amortized.

For example, I will use a $300,000 mortgage to show you a comparison between a 40 year loan and a 30 year.

30 year mortgage
Payment $1,896.20
Interest paid in first 12 months $19,401.28
Principal paid in first 12 months $3,353.12

40 year mortgage
Payment $1,837.12
Interest paid in first 12 months $20,579.35
Principal paid in first 12 months $1,466.09

The 40 year mortgage is only $59.08 lower in payment.
The 40 year mortgage is $1,178.07 higher in interest payments.
The 40 year mortgage pays $1,887.03 LESS toward your principal.

So you saved roughly $720 in the first 12 months on the payment and you lost that and then some on your principal reduction and interest payments.

You can use a 40 year mortgage calculator yourself to run your own numbers. Just use 480 months instead of 360. And what you will find is you may save a little on the monthly payment but pay dearly in extra interest.

40 year mortgages are stupid. I hope now that you’ve seen the numbers you realize that too. Don’t fall for 40 year loans or whatever new stunt the bank decides to pull.

Good Luck!

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