5 Tips About 40 Year Loans

40 year loans are becoming popular – is one right for you?

In this period of generally rising interest rates, 40 year loans have been introduced to give borrowers more options.

Here are some things to consider:

1.         Lower payment

A longer loan term allows for a lower payment. A 40 year loan has a lower payment than a 30 year loan. A 30 year loan for $500,000 at 6% is $2,998, while a 40 year loan with the same terms has a payment of $2,751. This is approximately 10% lower. This can help offset increasing interest rates.

2.         Rising interest rates

In a rising interest rate environment, a 40 year loan term is one way to get a lower payment.

3.         Interest-only period

Some loans allow for an interest-only period for part of the loan term. This also allows you to make a lower payment. The loan term by itself (30 year, 40 year) doesn’t affect the payment on an interest-only loan.

4.         Fixed term

Many loans that have a 40 year term are fixed only for the first 30 years. Check to see how long the loan interest rate is fixed. A 40 year loan term can be fixed for less than 30 years.

5.         Even lower minimum payments

Option ARM loans allow you to pay less than your monthly interest expense. These loans used to be based on a 30 year loan term. Now 40 year loan terms are available, making the minimum payments even lower. 40 year loan terms have been added by many lenders that offer minimum payments option loans. Sometimes the minimum start rates are a little higher, such as 1.25% instead of 1.00%.

6.         Risks

It is important to understand if this loan is right for you. A longer loan term will give you more time to pay the loan off. It will also take longer to pay the loan down so you build equity more slowly.