Fixed Rate 40 year
The 30-year fixed rate mortgage is considered the "vanilla" loan variety. This may not suit your needs or financial goals. It makes sense to look at a variety of options so that you know what works for you.
Older people often look at home prices and say, "How will the young people be able to afford this?" I have never seen any of them decide to sell their real estate at a discount price in the name of social responsibility. So, if you are someone who is just starting out in the real estate market, you’d better come up with some other way to make those inflated home prices affordable.
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One option that has only recently become available is the 40-year loan. By adding 10 years to the life of your loan, you can bring the monthly payments down considerably. Let’s say you’ve found your dream home or just one that you can live with and it carries a price tag of $300,000. Let’s also assume you have some money, say $50,000, to put down on the house.
If you’re able to cover all your closing costs, you are left with a mortgage of $250,000. If you were to take out a 30 year fixed rate loan at 7% you’d be facing a payment of $1663.26 every month before taxes and insurance. If you were to take out a 40-year loan, you could shave over $100 per month off that bill. The monthly payment on the 40 year loan would be $1553.58.
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The money doesn’t come free. You pay more in interest over that extra 10 years and the amount will surprise you. You’ll have paid $348,772 in interest by the time you pay off your 30 year loan. But if that shocks you, wait till you see the total on that 40 year loan - $494,717. The extra time costs you over $145,000.
One way to cut this bill is to take out the longer term loan but pay off extra every month. Even $50 extra a month can make a huge difference. You’ll pay off the loan over 5 years earlier and you’ll pay a total of $412,114 in interest. The extra payment saves you almost $83,000 in interest.
Invest some time into looking at all your options before you sign on to a loan. You can always refinance if you find a better deal but every time you refinance, it costs you money.
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