:: The Cons of 40 & 50 Year Home Loans (NEW)

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Summary
The traditional home loans have a duration of 15 & 30 Year Loans. Now mortgage lenders are beginning to offer longer duration for home loans, reaching out as far as 40 and 50 years. This comes in response to the still growing prices of real estate, especially for many on the West and East coasts who are seeing median prices of home hover around $500,000 to $600,000 in some areas. It is tempting thus to spread your home loan over a 40 or 50 year period, but is it really the right decision? These loans tend not to actually bring your monthly payment down though and come at a higher interest rate (thus a higher total price of the loan).

More Details
Industry advocates remind that stretching your loan by 10 to 20 years that the extra 10 or 20 years won't reduce your monthly payments all that much. You'll additionally pay much more interest to the bank, and your home's equity will grow at a slower pace.

Why is the interest rate higher for a longer loan? Home lenders increase the interest rate the longer they have to wait to be repaid. That's because they're accepting more risk the longer the loan is stretched out (the longer the loan the more likely a consumer may not be able to pay it back). So 40 year and 50 year home loans come with higher interest rates.

Specific Example
The impact of taking a longer duration loan is best understood when we run through a scenario you're likely to encounter in real life. Let's say a consumer with fairly good credit wants to obtain a fixed-rate $500,000 loan. Let's look at what your estimated interest rate, approximated monthly payments, and total cost of your loan are in each scenario (all approximated of course):

• 15 Year Home Loan
  - 6.00% interest rate
  - Monthly payments of $4,220
  - Total of $259,470 paid in interest
  - Total cost of the loan becomes $759,471
  
• 30 Year Home Loan
  - 6.25% interest rate
  - Monthly payments of $3,079
  - Total of $608,291 paid in interest
  - Total cost of the loan becomes $1,108,291
  
• 40 Year Home Loan
  - 6.50% interest rate
  - Monthly payments of $2,927
  - Total of $811,624 paid in interest
  - Total cost of the loan becomes $1,311,623
  
• 50 Year Home Loan
  - 6.75% interest rate
  - Monthly payments of $2,913
  - Total of $931,849 paid in interest
  - Total cost of the loan becomes $1,431,849

You'll notice that the monthly payments barely go down as you increase your loan by an entire decade! You save only $150 when you go from a 30-year loan to a 40-year loan. From a 40-year loan to 50-year loan you save even less per month, only $14.

Additionally, as you save only a very little on the monthly payment, it comes at a price of over $200,000 to go from a 30-year to 40-year loan and an additional price tag of over $100,000 as you go from a 40-year to a 50-year loan. You can see that there is a COST as you increase the loan duration.

You can use the free MS Excel template provided in the Resources section, the Home Loan Calculator with Extra Payments, to run these calculations yourself as well.