Stretching out to a 40-year mortgage from the standard 30-year home loan will result in a lower monthly payment. You may need or want the lower payment to qualify for a loan or fit your budget, but paying an extra 10 years on a home loan will add significantly to the total amount of interest you will pay.
30-Year vs. 40-Year Numbers
Although the amount of interest paid on a mortgage depends on the actual rate of the loan, some comparison examples show the difference between a 30-year and a 40-year mortgage. The payments and interest were calculated for a $200,000 loan. Interest rates of 4.5 and 6 percent show the effects of a higher or lower rate: 30-year at 4.5 percent: Monthly payment: $1,013; total loan interest: $164,814. 40-year at 4.5 percent: Monthly payment: $899; total loan interest: $231,577. 30-year at 6 percent: Payment: $1,199; total interest: $231,677. 40-year at 6 percent: Payment: $1,100; total interest: $328,201.
With the 4.5-percent interest rate, going with the 40-year loan reduces the payment by $114 or 11 percent. The trade-off is paying $66,763 or 40 percent more in interest payments. At the higher 6-percent interest rate, the payment saving is $99 or just 8 percent. Interest paid increases by $96,524 or 42 percent. Picking a 40-year mortgage over the 30-year choice is more effective for saving on the monthly payment if interest rates are lower.
Less Than Full Term
It may seem unlikely that you will stay in the home or keep the mortgage for 30 or 40 years, so the lower 40-year payment could be a benefit. If the house is sold after 10 years, the monthly savings for a 40-year mortgage on a $200,000 loan would add up to about $12,000 in payment savings. The loan balance on the 30-year option will be about $17,000 less than with a 40-year loan after 120 payments at the 4.5 percent rate. The lower payment on the longer loan results in a significantly slower loan balance payoff.
Going with a 40-year home loan instead of a 30-year loan will result in a moderate reduction in the monthly payment at the cost of paying significantly more interest. Even if you do not keep the loan for the full term the savings do not add up. Also, the interest rate available for a 40-year mortgage may be higher than on the widely used 30-year mortgage. A higher rate both reduces the payment advantage and increases the amount of interest to be paid.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.