40 year home mortgage
Buying a home is good way to build a long term asset." Most people, including working class and middle income group aspire to own a house rather than pay hefty sums for a rented house. Varieties of choices are available for the prospective borrowers to finance purchase of a house-. Short term loans of five to seven years tenor or Long term home mortgages.
If we talk of long term finance, basically there are two types: Fixed rate mortgage and Adjustable Rate Mortgage (ARM).Within these two categories there are several variants. There are a few factors that prospective borrowers must bear in mind before approaching a lender, such as their repaying capacity, interest rate fluctuations over the tenure of the loan and their other financial obligations.
For years the standard practice in the mortgage lending industry in the USA was 30-year fixed term loan because the lenders could not trade mortgage loans of a period more than 30 year fixed term and they did not like to saddle with the mortgage beyond 30 year period. However, the situation changed in 2005 when Federal National Mortgage Association (Fannie Mae), A Government sponsored enterprise started buying 40 year loans.
Forty year loans are mortgages financed over a period of 40 years. There are, broadly, two types of 40 year mortgages: Fixed rate mortgages and Adjustable Rate Mortgage (ARM).Following are some of the benefits in a 40-year fixed term mortgage:
Lower monthly payments than what one would pay on a loan amortized over a shorter tenure.
Not vulnerable to interest rate fluctuations.
Lower debt to income ratio. As the loan is spread over more number of years, the borrower may qualify for larger mortgages with lower monthly instalments
Borrower can afford a bigger and spacious house. Suitable for first time home buyer. Higher income borrowers may prefer 40 year loan in view of tax deduction towards mortgage interest.Fixed lower monthly payments mean more income at the disposal of the home buyer to meet his other commitments and his monthly budget.
It is flexible. With the rise in the salary income in future,one can always pre pay the loan and convert into a shorter loan to lessen the interest burden.
However, there are a few disadvantages in a 40- year mortgage. These are:40 year fixed loan carry higher interest rate-1/4 to1/2 of a percentage point than
30-year mortgage. The total interest payments would be much higher as compared to a 30-year
mortgage.Ten years of extra mortgage means higher interest payments, lesser repayment of principal and consequently slower pace in build; up of home equity.
Forty year home mortgage is gaining in popularity both in the USA and Canada. In view of sub-prime crisis, home prices have come down in recent times. It is, therefore, still attractive for working class who have steady stream of monthly income and qualify for 40-year fixed mortgage loan.
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