Addresses Pros, Cons of 40-Year Mortgages

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Long mortgages offer some short-term advantages, but disadvantages too.

With the mortgage market on shifting ground over the past year, fixed-rate mortgages have taken the spotlight -- but co-founder and co-CEO Andrew Housser cautions homeowners to look closely at one growing fixed-rate option, the 40-year mortgage.

"In the last few years, the structure of mortgages has changed very rapidly among U.S. home buyers. Just as rapidly, too many buyers have become overcommitted to debt, and many mortgages have failed," noted Housser." One product that still raises curiosity after the mortgage meltdown is the 40-year mortgage, which can be either an adjustable-rate (ARM) or a fixed-rate loan. In its fixed-rate form, explained Housser, it can be a less risky way for borrowers to lower monthly payments while avoiding the ARMs or interest-only loans that have gotten some buyers into trouble.

Housser, whose company is a free online consumer finance portal (, advises potential home buyers to look closely at the pros and cons of this mortgage product.

Advantages of the 40-year mortgage

Paying off a home over a 40-year period offers several advantages:

1. Smaller monthly payment. Housser noted that this is the big incentive for buyers to select this type of loan. On a $200,000 loan at 5.75 percent interest, a 40-year mortgage can save buyers about $100 per month over a similar 30-year mortgage.

2. Qualify for more home. With rising home prices and debt-to-income ratio requirements, many buyers with only a small down payment (especially first-time buyers) are finding they simply cannot afford the home they want. By keeping monthly payments lower, buyers can qualify for more expensive homes.

3. Take a bigger deduction. Some experts argue that these mortgages could offer high-income home buyers greater income-tax deductions because of the significantly higher interest payments. "This argument only merits consideration if the homeowner can confidently invest his/her money at a higher return than the cost of the interest on the mortgage," Housser said. "The bottom line: It is a questionable advantage."

Buyer beware … disadvantages abound

As with any finance product that sounds too good to be true, Housser noted that the 40-year mortgage has disadvantages, too:

1. Slow equity. While buyers are paying principle on the loan (unlike an interest-only loan), the principal payments are small, and remain small for a long time. Equity will accrue, but significantly slower than with a traditional mortgage.

2. Huge interest payout. Interest, in contrast, will mount up faster and higher than for a traditional mortgage. The 40-year loan cited above will result in $90,000 more in total interest payments over the life of a loan compared with its 30-year equivalent.

3. Buying too soon. Some buyers are lured by 40-year mortgages because they can buy a home sooner than with a 30-year mortgage. But those who believe they need the 40-year mortgage because they have too much debt to qualify for a shorter-term mortgage should think twice. Having that much debt may indicate that they should not be purchasing a home at all. Instead, prospective buyers would be wiser to work to pay off some debt first, and then look for a home to buy. They will have lower risk of default, which could take away the home, credit rating, and chance to buy another home.

"Is a 40-year loan ever a good idea? For first-time buyers with low debt in a high-cost housing market, the 40-year mortgage might allow them to get into the market now as opposed to later," Housser conceded. "Then again, if you see yourself moving within a few years, before an ARM would reset, a five- or seven-year ARM could do the same thing -- while building more equity. Your best move depends on a variety of factors, so weigh the decision carefully."

Based in San Mateo, Calif., is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at Since 2002, has served more than 30,000 customers nationwide while managing more than $1 billion in consumer debt. is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.


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Aimee Bennett
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