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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.
December 29th, 2006 at 12:06 am
[…] In Part II of the Creating Affordable Payments series, we looked at 40 and 50 year loans to see if the advertising claims about lower were true, and we found that these loans do not really help, and the overall interest cost is much higher. In Part III , we looked at Intermediate ARMs to see if they were the answer to today’s most common challenge. Unfortunately, with the inverted yield curve in U.S. Treasury securities, the rate on a 5/1, 7/1, or 10/1 ARM is often higher today than the 30 year fixed. […]
January 8th, 2007 at 11:24 pm
[…] In Part II of Creating Affordable Payments you’ll learn the truth about 40 and 50 year loans. Got a question or need help with your loan. Email me. It’s what I do. […]
January 19th, 2007 at 8:38 am
[…] Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate arms—the 3/1, 5/1 and 7/1–-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely. […]
June 16th, 2008 at 4:42 pm
[…] fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate arms—the 3/1, 5/1 and 7/1–-in Part […]