40-year Mortgage can lower your monthly payments

As real estate prices continue to rise, it is becoming more difficult for many people to buy homes. Even with the bursting bubble that many experts are predicting, the average young American couple will still have trouble buying their first home. In order to open up the market to more people, lending institutions have developed new mortgage plans. Some feature longer periods of fixed rates and others simply feature longer pay periods.

The 40-year mortgage's main benefit is lower monthly payments. If you have a 30-year mortgage of $150,000 with a 6.875 percent APR, you will pay $985 per month. If you stretch the same mortgage out over 40 years, however, your monthly payments will be only $919 per month. Even if you do not need lower payments, you can still benefit from a 40-year mortgage, because you will gain additional purchasing power. This means that you will be able to borrow more money for a longer mortgage and put it towards the house you want.

Problems with a 40-year Mortgage
With the lower monthly payments related to a 40-year mortgage comes higher total interest payments. You can actually end up paying well over $100,000 more in interest throughout the course of a 40-year mortgage than you would over 30 years. It also makes it harder to establish home equity, because less of each monthly payment actually goes toward reducing the principal balance.

Young first-time buyers will benefit the most from a 40-year mortgage, principally because it will enable them to hold onto more money for themselves each month. However, older buyers will find that they have mortgage debt to deal with late into their 70s and beyond if they go with a 40-year mortgage.

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