You pay huge buckage for the privilege of taking out that 40-year loan for a slightly larger amount, though: $191,426 more. That's how much more interest you would pay over the life of the 40-year loan in the example above -- partly because you're borrowing a little more, but mostly because you're paying interest for 40 years instead of 30 years.
That objection to 40-year mortgages has a flaw: Most mortgages are paid off early, anyway, when the borrower refinances the loan or sells the home. Hardly anyone is going to make payments on the same mortgage for 40 years.
Another drawback to a 40-year mortgage: You build equity more slowly. With that 40-year loan in the example above, you would pay $107.29 in principal the first month. With the 30-year loan, you would pay $215.61 in principal the first month -- building equity quicker on a slightly smaller loan amount.
Although borrowers can use 40-year mortgages to squeeze into more expensive houses, that's not a great reason to get one.
"I would not recommend that anyone use a 40-year amortization to be able to afford more home than under a 30-year loan," says Daniel Roe, a certified financial planner and principal with Budros & Ruhlin financial advisers in Columbus, Ohio. "The best plan is to figure out what you can comfortably afford and then structure the mortgage that is best, given your overall goals."
