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People who are looking to minimize their monthly mortgage payment sometimes consider a 40-year loan

People who are looking to minimize their monthly mortgage payment sometimes consider a 40-year loan

While this can be a useful product for some borrowers, it’s one that you need to approach with caution.

Though they’re somewhat uncommon in terms of the overall mortgage market, many lenders offer 40-year loans as part of their product lineup, though they may not promote them extensively. You may have to inquire with your lender about their availability if you’re interested in one.

The key reason for getting a 40-year mortgage is that they allow you to stretch out your payments as much as possible, thereby minimizing what you have to pay each month. The downsides is that it takes a very long time to pay off the loan, the total interest payments are significantly higher than on a comparable 30-year mortgage, and you’ll build equity only slowly.

On top of that, the reduction in your monthly payment from taking out a 40-year mortgage is fairly modest, compared to a 30-year mortgage, perhaps only $100 a month on a $250,000 mortgage. For that reason, many lenders tell their customers that stretching out their mortgage another 10 years for such relatively small savings just isn’t worth it.

30- vs. 40-year mortgages

We’ll run some of the numbers to show just how they play out.

Let’s say you want to borrow $250,000 to buy a home. A 30-year fixed rate mortgage at 4.25 percent would give you a monthly payment of $1,230, plus taxes and homeowner’s insurance. Over the life of the loan, assuming you make the standard payment every month, you’ll pay about $193,000 in interest.

Now let’s consider the same loan as a 40-year fixed-rate (virtually all 40-year mortgages are fixed-rate these days). For starters, you’ll have to pay a somewhat higher interest rate than on the 30-year loan – usually about a quarter-percentage point more.

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