CREATING AFFORDABLE PAYMENTS (PART II)

40 and 50 year loans

These days, a lot of clients ask about 40 & 50 year loans. The industry has advertised these as a way to create affordable monthly payments.

The idea sounds good. But do they fulfill that promise, or is this just another marketing gimmick? Let?s have a look.


In Part I, we watched monthly payments drop dramatically when we stretched the term of the loan from 15 to 30 years. Stands to reason then that the same thing would happen if we stretch a 30 to a 40 year term, right? Let?s do the math.

15 year loan, $300,000, 5.75% = $2491 mo
30 year loan, $300,000, 6.00% = $1798 mo
40 year loan, $300,000, 6.25% = $1703 mo
50 year loan, $300,000, 6.50% = $1691 mo

Does that surprise you? Stretching the term from 15 to 30 years saves $700 per month, but going from 30 to 40 years saves less than $100 per month. Going on to a 50 year loan would save only $12! If you?re hundreds of dollars away from a comfortable 30 year payment on that new house, then a 40 or a 50 year loan won?t make you twist and shout.

It gets worse. At this point, 50 year loans are offered mainly by ?subprime? lenders at much higher interest rates than I used here. I could probably end right here, but let me at least give you the total interest figures for the 40 year loan before I do.

15 year loan = $148,421
30 year loan = $347,515
40 year loan = $517,545

So what do you think? Effective tool for creating more affordable payments or marketing gimmick? In Part III we?ll look at the 3/1, 5/1, 7/1, and 10/1 ARMs, a place where we can normally get some real help.

If you have a question or need help with a loan, email or call. It’s what I do.

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This entry was posted on Tuesday, November 21st, 2006 at 2:54 pm     and is filed under Affordable Payments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.