40 and 50 year mortgages

In an attempt to steer away from interest only loans yet still provide borrowers a payment they can afford the mortgage industry has embraced 40 and 50 year amortization.

The longer amortization has opened up opportunities for potential homeowners who are not highly risk tolerant. These 40 and 50 year amortized loans are also available for short term objectives. The 2/38 ARM for example will provide a 2 year fixed rate with 40 year amortization. This payment is very close to an interest only payment which is clearly helpful for many borrowers.

What many borrowers do not realize is that the amortization schedule can be accelerated by making more than the monthly payment and directing this overage to be applied towards principle. The benefit of the longer amortization is the required monthly payment each month is obviously lower.

Example:

$250,000 @ 6.5% 30 yr = $1580.17

$250,000 @ 6.5% 40 yr = $1463.64

Difference = $116.53

In the above example a 30 year loan has a payment of $116.53 higher than the 40 year loan. However, if you made the additional payment of $116.53 each month towards principle it would payoff the loan in 30 years.

The point is that while you have an extended amortization with 40 and 50 year loans you are not bound to that amortization. The benefit is that it gives you the flexibility of a lower payment when it is needed.

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