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40 Year Interest Only

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The Lesser-Known, not so common, but highly AMAZING 40-Year Interest Only Mortgage

Why aren’t more people talking about this awesome loan product?!

You’ve been on the hunt for your dream home, enlisted a real estate agent and even visited a banker or two to talk about your home loan options. Chances are none of these professional people told you about one of homebuying’s best-kept secrets: the 40-year mortgage.

Ruben Garcia Mortgage Group - Interest Only

This lesser-known mortgage is not getting much of the love it deserves. Instead, all that love and attention are going to its much more common counterparts: the 30- and 15-year mortgages.

So, what is a 40-year mortgage? The terms vary by lender, but a basic 40-year mortgage works much like a 30-year mortgage, with payments stretched out over an additional 10 years. It’s really that simple. A longer-term typically means a smaller mortgage payment.

A 40-year mortgage can be hard to find and isn’t for everyone, but it may be right for homebuyers with good credit who are looking to buy a new home that’s a stretch for their budget. If you are considering a 40-year mortgage, it’s crucial to do your homework, understand the pros and cons, look at alternatives and make sure this unusual mortgage is the best choice for you.

40-year mortgages are also very common on investment homes. As a matter of fact, they are highly coveted by investors that appreciate cashflow.

Do 40-year mortgages exist?

We’ve already learned that 40-year mortgages are not a myth. They are as real as any other mortgage loan. But homebuyers trying to find a 40-year loan may have a hard time tracking one down because not all lending institutions offer them. We can proudly say, that we are one of the few institutions that offer them.

Here are some different ways a 40-year mortgage may work:

A traditional, fixed-rate mortgage with a 40-year term

These 40-year mortgages work exactly like 30-year, fixed-rate mortgages but with payments stretched out over an additional decade. A fixed-rate, 40-year mortgage will have a fixed interest rate over the entire life of the loan, meaning it will never change.

A 40-year mortgage with an adjustable rate

While fixed interest rates are much more common, some 40-year mortgages may come with an adjustable interest rate (ARM). The ARM products (10/1, 7/1, 5/1 ARM) work the same way on a traditional 30-year amortization schedule as they do on the 40-year amortization schedule. The main difference? That the payment will be lower on the 40-year term versus the 30-year term because the loan is stretched for an additional 10 full years. Homebuyers should be careful when considering this type of mortgage because interest rates could rise significantly. Educating yourself on the pros and cons and having a game plan is crucial for these types of loans.

A mortgage that requires you to pay only interest at the beginning

There are 40-year mortgages are structured so you pay only interest for the first 10 years. After that period, the loan converts to what is essentially a 30-year, fixed-rate mortgage. Homebuyers should use caution when considering this type of loan, as they will build zero equity during the initial period. Why zero equity? Because on an interest-only loan, you literally only pay the interest portion of the loan. Example: if you borrower $500,000.00 and your interest-only monthly payment is $2,000.00 and you made this payment for 10 years, at the end of the 10 years you would still owe $500,000.00

A mortgage with a balloon payment due at the endFinally, (not so common but available option) some 40-year mortgages are amortized over 40 years but are actually due in 30 years. This means you benefit from lower payments as if you had a 40-year mortgage, but you actually have to pay the remaining balance in a lump sum after 30 years. This type of mortgage can be quite risky for homebuyers because they may not be able to come up with the large final payment. This structure is not very common, mainly because it’s not realistic that a borrower will hold on to the mortgage for 30 years knowing that there is a balloon balance due at the end.

A 40-year mortgage with an adjustable rate

While fixed interest rates are much more common, some 40-year mortgages may come with an adjustable interest rate (ARM). The ARM products (10/1, 7/1, 5/1 ARM) work the same way on a traditional 30-year amortization schedule as they do on the 40-year amortization schedule. The main difference? That the payment will be lower on the 40-year term versus the 30-year term because the loan is stretched for an additional 10 full years. Homebuyers should be careful when considering this type of mortgage because interest rates could rise significantly. Educating yourself on the pros and cons and having a game plan is crucial for these types of loans.

A mortgage that requires you to pay only interest at the beginning

There are 40-year mortgages are structured so you pay only interest for the first 10 years. After that period, the loan converts to what is essentially a 30-year, fixed-rate mortgage. Homebuyers should use caution when considering this type of loan, as they will build zero equity during the initial period. Why zero equity? Because on an interest-only loan, you literally only pay the interest portion of the loan. Example: if you borrower $500,000.00 and your interest-only monthly payment is $2,000.00 and you made this payment for 10 years, at the end of the 10 years you would still owe $500,000.00

A mortgage with a balloon payment due at the end

Finally, (not so common but available option) some 40-year mortgages are amortized over 40 years but are actually due in 30 years. This means you benefit from lower payments as if you had a 40-year mortgage, but you actually have to pay the remaining balance in a lump sum after 30 years. This type of mortgage can be quite risky for homebuyers because they may not be able to come up with the large final payment. This structure is not very common, mainly because it’s not realistic that a borrower will hold on to the mortgage for 30 years knowing that there is a balloon balance due at the end.

Advantages of a 40-year mortgage

Most experts generally do not recommend 40-year mortgages, but they may be viable options in certain situations. Here are some benefits of a 40-year mortgage:

Lower monthly payments

The main advantage of a 40-year mortgage is lower monthly payments. This may be especially helpful for a first-time homebuyer seeking to buy property more expensive than a typical starter home, especially in parts of the country with extremely high housing costs, such as California. This can help a homebuyer who is barely on the edge of being able to afford a home in a high-cost area. If 30-year mortgage monthly payments are just a bit too high, a 40-year mortgage could mean the difference between getting into a home or being priced out of the area where you want to live. Lastly, investors looking for cash flow rather than long term equity.

Interest rate locked in longer

If you get a fixed-rate, 40-year mortgage, you also get your interest rate guaranteed for a longer time period than is typical for a mortgage. This could be beneficial if interest rates rise over the years.

What’s the Downsides of a 40-year mortgage?

Forty-year mortgages do have some disadvantages to them. Depending on the borrower applying for it, the type of property, and the main use of the property (primary home, second home, investment, etc.)

You may pay a higher interest rate

As you may already know, the longer the term the higher the rate. Depending on a few criteria’s this can impact your rate in a negative way. It works the same way with a 10-year, 15-year. 20-year and 30-year loan. The longer you extend the term, the more likely you are to pay a higher interest rate.

You build equity more slowly

With a 40-year mortgage, you build equity at a slower rate than with a 30-year mortgage, and at a much slower rate than a 15-year mortgage. This holds true especially if you get a 40-year mortgage that is structured so you pay interest only for a period of time at the beginning of the loan. For example, if you have a mortgage with a 10-year, interest-only period, you build zero equity for the first decade, then you build equity slowly over the following decade.

You may be taking on more risk

Depending on the type of 40-year mortgage you get, you may be signing onto a risky proposition. For example, if you get an interest-only, 40-year mortgage, where you pay only interest at first, you risk having built no equity in your home if you move sooner than anticipated. Let’s assume worst-case scenario: you’ve been paying on your home for 10 years, homes have not increased in value (basically your home is worth the exact same amount than what you bought it for), and now you are ready to sell your home. If this happens to you, you will be put in a hard spot, since typically most homeowners selling their home payout agent commissions from the equity of their home at the time of sale closing.

If you sign on for a balloon mortgage, you risk losing your home if you can’t come up with the cash for the lump sum payment at the end.
If you’re considering a 40-year mortgage, it’s important to crunch numbers carefully and compare options to make sure the benefits outweigh the downsides.

This is exactly why we are here! If you have questions, concerns, doubts or just want to know more… please give us a call. We are here to help.

The bottom line

In the world of home buying, it’s rare to spot an offer for a 40-year mortgage. However, they may be the right choice for some homebuyers in expensive parts of the country.

Before you sign the papers for a 40-year mortgage, it’s important to weigh the pros, such as lower monthly payments, as well as cons, such as paying more over the life of the loan and staying in debt longer. Keep in mind, too, that you do not have to be stuck in a 40-year mortgage — you may choose to refinance to a shorter term. Some people use this loan simply as a way to get their foot in the door. Maybe you have growth opportunity at your current job, your spouse will soon be going back into the workforce, etc. There are many reasons why a 40-year term can work in your favor. Many people refinance or sell their home before their full mortgage terms are up, over 70 percent of people will refinance or sell their home before their term comes to an end.

Most homebuyers probably will find it makes sense to go with the more common and widely available 30-year mortgage. And if a 30-year mortgage is too much of a squeeze on your budget, you may want to think about whether you can truly afford a home right now and consider other options. These include buying a smaller home, purchasing in a less expensive neighborhood or even postponing homeownership while saving up additional cash for a down payment. It’s always best to go into homeownership fully financially prepared, so waiting sometimes makes the most sense.

As always, we are here to help. Don’t hesitate in reaching out to us with any questions or concerns.

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$1421

Monthly Payment

Principal & Interest $1421

Monthly Taxes $1421

Monthly HOA $1421

Monthly Insurance $1421

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