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The Advantages and Disadvantages of a Longer-Term Mortgage

07/19/2010

Longer-term mortgages sound like a crazy idea. But in some situations, taking a mortgage out for 40 or even 60 years may make sense. How do you know if a 40- or 60- year mortgage makes financial sense in your situation? Like everything in life, you need to evaluate the advantages and disadvantages.

Several factors are fueling the popularity of longer-term mortgages. The housing bust has caused home prices to fall dramatically. But many lower prices are still too expensive for some borrowers to afford with a traditional 15- or 30-year loan. Plus, no interest adjustable rate mortgages and other mortgage options are still too risky for many homebuyers.

Let's take a look at the disadvantages first.

Home ownership might not happen: Instead of building equity and becoming a valuable asset once it's paid off as a home usually does, a 40- or 60- year mortgage may make homeownership impossible. If that happens, what you're doing each month really won't be any different than paying rent. Before choosing a longer- term mortgage consider the age you'll be at the end of the term.

Interest rates will be higher: The longer the term, the higher the interest rate. Interest on a 40-year mortgage will be higher than the rate on a 30-year mortgage. Interest on a 50-year mortgage will be even higher than it is on a 40-year mortgage. With the help of the california homebuyer tax credit you may be able to secure a 10,000 tax credit for your home purchase. This will help offset the higher interest rates

Total cost of interest will also be higher: Besides a higher interest rate, the total amount of interest you pay over the life of the loan will be much higher. That's because you'll pay interest for a longer period with a 40- or 60-year mortgage.

And now, the advantages
.
You may be able to purchase a bigger home: Spreading the mortgage payments out another 10, 20 or 30 years can lower your monthly mortgage payment, making it possible to purchase a more expensive home than you otherwise could afford with a 30-year mortgage.

You may be able to refinance: Just because your mortgage starts out as a 40-year mortgage doesn't mean that's how it has to end up. Once you pay down some of the debt, you may be able to refinance into a shorter-term mortgage.

You'll have more affordable payments: The longer you're willing to make mortgage payments, the lower those mortgage payments can get. In these challenging financial times, a longer-term mortgage is the only way some homebuyers can afford homeownership.

The bottom line is this
Before deciding on a longer-term loan, make sure doing so will help you build more wealth rather than more debt. If it doesn't, consider choosing a less expensive home or waiting until your financial situation improves.

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