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Say “No” to the 40 Year Mortgage

by Kevin Mercadante

As a way to increase mortgage affordability, mortgage lenders are beginning to resurrect the 40 year mortgage. Not that it was ever that popular during the housing boom of the early 2000’s, but it is now seen as a way to enable more borrowers to qualify for mortgages, and in higher loan amounts. But no matter what you read about the advantages of the 40 year mortgage, the best response is to say “No” to them.

While it’s true that a 40 year mortgage will leave you with a lower house payment than a 30 year mortgage – and certainly a 15 year mortgage – what happens beyond that is mostly a series of negatives.

The 40 year mortgage is the worst loan if you hope to ever pay it off

40 year mortgageA 40 year mortgage is actually the perfect mortgage – if you never plan to pay it off! If it’s tough to payoff to 30 year mortgage, it’s close to impossible to extinguish a 40 year mortgage, and particularly to do it ahead of schedule.

There may even be a problem related to longevity. If you are 50 years old for example, and you sign on for 40 year mortgage, the payoff date on the loan will not occur until you’re 90. The statistical problem with that arrangement is that – medical advances notwithstanding – very few people live that long.

What you are really saying with a 40 year mortgage, is that you never intend to pay off your mortgage. You’ll have it for the rest of your life.

A higher percentage of your monthly payment is interest for a lot longer

With a 30 year mortgage, for the first few years of the loan, the majority of your monthly payment go to pay interest on the debt, not the principle that pays it off. It’s far worse if you’re taking a 40 loan.

The problem is that you simply spend considerably more time with a 40 year mortgage primarily paying interest. You can own the house for a decade or more, without making a serious dent in the amount of the original loan.

Some financial planners actually advocate for this type of arrangement. The thought is that the higher – and longer – interest portion is an excellent tax deduction. That may be true if you’re in the top tax brackets, paying 35% or 39.5% of your highest income earned into federal income taxes alone.

But for most people, who may only be in the 10% or 15% federal income tax brackets, the tax benefit that you receive for paying more interest for more years may not offset the extra interest paid. The problem is that this is a tax deduction that you are paying out real money in order to achieve. You are accepting paying a greater amount of interest in exchange for tax deduction at a very low rate.

Complicating this arrangement is the fact that many people no longer have the benefit of a mortgage interest rate deduction at all. Since the standard deduction for a couple who are married filing jointly is $11,900, it is entirely possible that the interest you’re paying on your mortgage is well below this figure. If it is, there’ll be no tax benefit at all – just higher interest payments for a very long time.

Slower loan amortization in the face of declining house values

The entire reason why 40 year mortgages last as long as they do is because the amortization of the original principal amount borrowed declines much more slowly than it does for shorter-term loans.

In a rising housing market, maintaining a higher level of indebtedness can make abundant sense. In that situation, you are using your mortgage indebtedness to effectively leverage a higher rate of return on your housing investment.

But rising real estate prices are no longer a given. Many people across America have still not recovered the equity that they lost in the 2008 – 2009 real estate and mortgage meltdown. It is a fact that house prices can go down as well as up.

If you have a 40 year mortgage, and house prices decline, you could be upside down on your house a lot faster, and for a lot longer, than people who take shorter-term mortgages.

The payment can get too comfortable

We can think of this as a soft factor, but one with potentially catastrophic consequences.

Debt is debt, and the primary objective should always be pay it off as quickly as possible. But the fundamental problem with the 40 year mortgage is that it holds your house payment to the absolute minimum. You can become so comfortable with the low house payment, that you never have any intention of ever paying it off.

Since the house payment is foundational debt, the philosophy that you develop in relation to it can carry over to other kinds of debt.

Just as you may become comfortable with a low house payment – and a large mortgage balance – that attitude could be reflected in other debt types. You could get comfortable with having multiple car payments, other installment loans, and credit card debts, with no serious intention of ever paying any of them off.

Your entire strategy in relation to debt could be one of always seeking the lowest possible payment.

While that may sound logical on the surface, it is not a strategy that will enable you to get out of debt. All it will do is make your debt payments more tolerable, so that you can stay in debt – maybe even forever.

The single advantage of the 40 year mortgage is keeping your house payment as low as possible. No matter how good a mortgage lender makes the loan sound, just say “no”, and ask for a 30 year loan or even a 15 year loan instead. As the years pass, you’ll be increasingly glad you did.


Published or updated January 24, 2014.
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