30-Year vs. 40-Year Mortgage

Is a 30-year or 40-year home mortgage the right choice for you?
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Does the idea of paying on a home mortgage for 30 years sound like an eternity? How about 40 years? As economic conditions tighten and people seek ways to obtain mortgages with lower monthly payments, the 40-year mortgage has started to gain acceptance. There are some factors you'll need to consider when deciding between a 30- and 40-year mortgage.

40-Year Mortgage Advantages

According to MSN Money, the major advantage of the 40-year versus the 30-year mortgage is that they enable you to make lower monthly payments without taking on the risk associated with an adjustable-rate mortgage (ARM). As with the traditional fixed-rate 30-year mortgage, you'll have the comfort of knowing that your payments will remain the same for the life of the loan. You could use the savings in mortgage payments for other types of investments like mutual funds or your 401(k) retirement plan at work.

40-Year Mortgage Disadvantages

Although your monthly payments will be lower with the 40-year mortgage, the difference may not be all that significant. If you finance $200,000 at 5.75 percent interest, you'll only pay about $100 less per month with the 40-year product as opposed to 30 years. Also keep in mind that the 40-year mortgage typically includes a slightly higher interest rate due to the longer loan term.

Slower Equity Growth

If you're concerned about building equity quickly, then a 40-year mortgage probably isn't for you. Your early mortgage payments primarily go toward the interest as opposed to paying down the principal. The longer your loan term, the longer it takes to start paying down the principal, and the more slowly your equity builds. Less equity means it can be harder to move up to a larger, more expensive home. You'll also have less to tap into if you wish to borrow against your equity at some point.

The 40/30 Hybrid

There are a few options available that can make a 40-year mortgage a bit more palatable by making the loan term a little shorter. One alternative is the "40-due-in 30" loan. For the first 10 years, your payment is based on a 40-year mortgage. After 10 years, the loan switches to a 20-year instrument at the same interest rate. If you can handle the payment increase, this method will allow you to own your home in 30 years instead of 40, and you may end up paying less in interest.

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