40-year fixed-rate mortgage

What is a 40-year fixed-rate mortgage?

A 40-year, fixed-rate mortgage is a loan product that permits the homebuyer to buy a home and make fixed, equal monthly payments over 40 years.

Deeper definition

Most potential homeowners don’t have the funds to pay up front for their home purchases. Taking out mortgages enables them to make payments for their homes over time. Since the home acts as collateral for the loan, mortgages usually have affordable interest rates. A fixed-rate mortgage has the same interest rate for the entirety of the loan.

Borrowers have a number of options when it comes to the term of their loans, including the 40-year, fixed-rate mortgage. A 40-year, fixed-rate mortgage seems attractive to a borrower who needs to stretch his or her cash as far as possible.

One caveat to a 40-year mortgage is that interest rates tend to increase as the term of the mortgage lengthens. Longer mortgages are riskier for banks as they prolong the amount of time that it is possible for the borrower to default on the mortgage.

Due to the increase in the interest rate, the monthly savings between a 30-year and 40-year mortgage is minimal. Since the length of the mortgage is longer than conventional loans, the borrower ultimately pays more in interest.

40-year fixed-rate mortgage example

The 40-year, fixed-rate mortgage still appeals to homebuyers who need to keep their monthly expenses as low as possible. Even though the savings offered by the loan are small, it makes a difference for cash-strapped borrowers.

For example, assume you want to purchase a $200,000 home. You have a 20 percent down payment, which leaves $160,000 to finance. Assuming a 30-year mortgage at 4 percent, expect monthly payments of $763.86.Extending the term to 40 years lowers the payment to $668.70. However, you have to factor in the higher interest rate associated with 40-year mortgages. If the interest rate increases to 4.5 percent, this yields a monthly payment of $719.30.

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