Housing costs have increased substantially over time, and more than a few lenders have addressed this issue by offering loan products that will make mortgages more affordable – the 40 year mortgage. 40 year mortgages are one of these recent offerings. There are advantages and disadvantages associated with these types of mortgage loans.
This kind of mortgage is essentially a loan that amortizes over a 40-year period. Consequently, your payments will last for forty years and will include the principal and the interest accrued during that time period. The plus side of this arrangement is that monthly mortgage payments are less than one would have with the more traditional fifteen or thirty-year term. For example, if you took out a £100,000 30-year loan for a home, and the loan carried an interest rate of 6.25%, you would pay about £600 each month for principal and interest. If, on the other hand, your loan for the same amount was for a 40-year term, it would carry a higher interest rate, but you would only pay about £560 each month. The amount doesn’t sound like much, but if you are struggling to meet your monthly expenses, this payment reduction could really help you.
40 year mortgage loans have some drawbacks, however. As the term for this kind of mortgage is longer than a standard mortgage, the lender assigns a higher risk to the borrower, and the borrower must pay more interest, accordingly. Usually, a 40 year mortgage will carry a rate that is 0.25 to 0.375 points more than a conventional mortgage will carry, and your credit score will determine the actual amount. As the amortization of the loan will last for ten years longer, the amount of interest that you pay over the life of the loan will be significantly higher than that of a traditional mortgage. Amortization of mortgage loans means that you will pay the majority of the interest early during the term of the loan. Equity will accrue at an extremely slow pace, as nearly all of your payment goes to pay off the interest.
You may be tempted to buy a home that is beyond your financial means if you consider the option of 40 year financing. You could have some severe financial problems at some point. However, those homeowners that need some relief from higher mortgage payments may find 40 year fixed mortgage loans to be their best option. When you are in a better financial situation, you can then refinance your 40 year mortgage to obtain one that will allow you to accumulate equity more quickly.
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