40 Year Loan

A 40 year loan is a way of making it possible for someone to buy property in a market where it is expensive relative to their income, a situation we see today in California, home of some of the most expensive zip codes in the US. While there are all sorts of variations possible - fixed interest rate, adjustable rate mortgages, ARMs tied to one or other interest index, reverse or negative amortization - the point of a 40 year home loan is simple: to make the monthly payments as manageable as possible.

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As with any mortgage there is an obvious trade-off between the length of the loan and the size of the monthly payment. Repayments are a combination of the interest and a payment off the principal (also known as amortization). Logically, each month you will pay off a little bit of the principal so that at the end of the term of the loan you have paid all of it off. This means that the longer the term of the mortgage the less of the principal you pay off each month, making each of those payments smaller. As you will also pay interest on the loan for longer, the total interest you pay is larger over those years.

What you have to ask yourself before considering a 40 year loan is this: just how much are you willing to pay over 40 years in order to keep your monthly payments low? While a 40 year loan may offer you the chance to buy a much larger home than you could otherwise afford, you may find that after making payments for the rest of your life it was not worth it.

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Rates as of Thursday, July 24, 2008

Institution Rate % APR
eloan 5.875 5.911
indymac 5.875 6.033
wellsfargo 5.875 6.051

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