The Risks Of 40-Year Mortgages

There are many tactics and strategies that lending institutions are using today in order to stay ahead of the recent financial crisis. Offering 40-year mortgages is one such idea that is coming back into trend.

This concept isn’t exactly new, but not too many people have heard of it. That is simply because the advantages are outweighed by the drawbacks; therefore it has stayed in the background of the loan business. Now that troubled citizens are having a hard time saving up for a down payment and experiencing difficulty coming up with each monthly installment, this type of mortgage is being offered more often. It may seem like a great opportunity at first, but the risks may be too great to take the chance.

Types of mortgages in this category are essentially the same as 30-year mortgages, but the interest rate and monthly payments are different. The term is actually only 30 years, but after that the remaining amount owed must either be paid in full or the loan has to be refinanced. The monthly payments are smaller than other options, but the difference can be disappointing. The savings only add up to about $100 per month at most.

This money can be used wisely if invested in retirement or another similar cause; another smart move would be to save it up for when the time comes to pay the remaining cost of the loan after 30 years. The interest rate on 40-year mortgages is higher by a quarter of a percent or more. Making payments for a longer period of time means that more interest will be paid eventually.

A third negative point about 40-year mortgages is the equity they acquire. In order for a home to gain value enough to help out the homeowner when it comes time to sell, there must be equity built up in the house. The rate at which these loans secure equity is tremendously slow. When there is not enough equity in the house, the homeowner is either stuck with the current loan, or stuck with extra costs when trying to sell.  This makes a 40 year mortgage a much less attractive option.  And if you’re looking for a no doc loan or even some type of 95 mortgages, then these loans probably aren’t for you.

If there is just no breathing room between the interest rates (see our Suntrust bank mortgage rates review) and monthly payments, plus the addition of taxes, insurance, and upkeep, the bad news about sluggish equity can be a deal-breaker. People that have income issues or bad credit are targeted for this type of loan, but these exact people should steer clear of them.

--------------------------------------------------------------------------------------------

If you liked this article, get email updates (they're FREE)

Enter your email address:

Delivered by FeedBurner

--------------------------------------------------------------------------------------------
About FPT Guy