April 25, 2023

In May, a new type of mortgage is set to hit the market: the 40-year mortgage. This mortgage offers borrowers a longer repayment period, which could result in lower monthly payments compared to traditional 30-year mortgages. While this may sound appealing to some, it's important to carefully consider the pros and cons before deciding if a 40-year mortgage is right for you.

On the plus side, the lower monthly payments can make homeownership more affordable, particularly for first-time buyers or those on a tight budget. This could make a big difference for people who live in areas with high housing costs. Additionally, the longer repayment period could help homeowners build equity more slowly, which could be advantageous for those who plan to sell their home in a few years.

However, there are also downsides to consider. First and foremost, the longer repayment period means that borrowers will pay more in interest over the life of the loan. This could add up to tens of thousands of dollars over the 40-year period. Additionally, a longer loan term could make it more difficult to build equity quickly, as a smaller portion of each monthly payment will go towards paying down the principal.

Let’s run through an example:

The average interest rate on a 30-year mortgage is 6.7%, assuming a 40-year mortgage has the same interest rate (though they will most likely be higher) this is how they would stack up.
- On a $300,000 home with 5% down, that payment would be $2,452/Month and the total paid would be $662,055.
  - Now with a 40-year mortgage, the payment would be $1,709/month however, the total paid would be $820,475.
    - That’s a difference of $160,000.
- Assuming the interest rate is even slightly higher on 40 years instead of 30 years, say at 7%, the difference would be almost $200,000 over the life of the loan.

In summary, the new 40-year mortgage coming out in May offers a longer repayment period and lower monthly payments, which could be beneficial for some borrowers. However, it's important to carefully consider the downsides as well, such as paying more in interest over the life of the loan. As with any major financial decision, it's a good idea to consult with a financial advisor. Give me a call and I’d be happy to discuss these changes and their long-term and short-term effects with you.