Business & Finance mortgage

Refinancing: 30-Year Vs. 40-Year Mortgage

    Extra Time

    • One of the biggest differences between these loans is the term of the loan. With the 40-year loan, you will have to make payments for an additional 10 years. A 30-year mortgage is already a fairly long term by most standards and adding 10 more years to that term can make it even more difficult to pay off your mortgage balance. The extra time may not make a difference for you depending on your situation. If you plan to sell the house soon, you may consider the 40-year loan.

    Payment

    • Many people like to get a 40-year mortgage because it allows them to get a lower monthly mortgage payment. When refinancing a mortgage, one of the primary objectives is to lower the monthly payment. With the 40-year loan, you can save money when compared to the 30-year loan. The difference between the two is usually not significant, however. You may be able to save somewhere between $100 and $200 per month for an average size house.

    Interest

    • The interest rate of these two types of loans is something else to consider. Even though your mortgage payment will be slightly lower with a 40-year mortgage, you will have to pay a higher interest rate. The interest rates for these mortgages are generally about 0.25 percent more than what you would pay with a 30-year mortgage. Over the life of your loan, you will pay thousands more dollars in interest with a 40-year loan.

    Equity

    • When looking at these two options, you also should consider how quickly you can build up equity. With a 30-year mortgage, most people feel that it takes a considerable amount of time to pay down your balance. With a 40-year mortgage, it is even harder to build up any equity in the property. For the first several years of the mortgage, the vast majority of your payment will go towards interest instead of principal.

    Loan Balance

    • If you are considering refinancing into a 40-year mortgage, you may also be able to get additional cash for other purposes. With a 40-year mortgage, you can generally qualify for a bigger loan than you could with a 30-year mortgage. This could allow you to get extra money for renovations or additions to your property. You could also use the money for debt consolidation or to make additional purchases. This will also increase your amount of debt, however.

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