40 Year Mortgage Vs. 30 Year Mortgage

Prudent Bear reports on the math on 40 year mortgages:

It sure looks like they’ll be popping up in California. The California Housing Finance Agency is also getting into the 40-year mortgage business. The housing agency wants to help residents who can’t otherwise afford California real estate by offering them the loan of a lifetime for most of a lifetime. Already the agency offers 35-year loans, so it has had some experience explaining the concept of eternity to borrowers. CalHFA is so keen on the 40-year product, that according to Andrew LePage of the Sacremento Bee, the agency thinks 40-year loans will account for 15-20% of its lending within the first year.



That’s pretty amazing considering these numbers:

a. Total interest paid on a 30-year mortgage loan of $300,000 at 6%. $347,515

b. Total interest paid on a 40-year mortgage loan of $300,000 at 6%. $492,308

c. Amount monthly payment is lowered by going the extra 10 years: $148


And then there are these numbers:

a. A borrower who turns 60 when his 30-year mortgage is paid off, will turn 70 by the time he pays off the 40-year version.

b. Principal on the 30-year loan described above is reduced by $49,000 after 10 years.

c. On the 40-year loan, 10 years of payments take the principal balance down by less than $25,000. And it takes almost 30 years to cut the principal balance in half.

We are skeptical that the 40 year mortgage is the wave of the future.But,we'd never bet against what the mortgage industry and Fannie Mae would promote to artifically drive the demand side of housing.