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Remember that “fabulous” young man or woman in high school that everyone wanted to date? You finally get your chance, and, unfortunately, you find they aren't nearly as fabulous as you thought. The 40 Year Fixed Rate mortgage can be somewhat like that. It may appear to be the answer to your prayers, and sometimes it is, and you rush into it. After a few years, however, you see that your principal has been reduced only very slightly and you now have buyer's remorse. Like the Interest Only mortgage loan, the 40 Year Fixed Rate product is neither good nor bad, but just a tool that, if used correctly, can be beneficial.
The interest rate is fixed for the entire term, although it will normally be somewhat higher than the 30 Year Fixed Rate loan. Why? The usual reason: Higher risk because of less principal reduction. That is also the reason that this loan isn't for everyone. It's interesting because many financial experts said the same thing about the 30 Year Fixed Rate loan. It was introduced when the 20 Year Fixed Rate product was the standard. Many disparaged the 30 Year loan for the same reasons. And now the 30 Year product is the standard.
When is the 40 Year Fixed Rate a good tool? When your gross monthly income and/or debt-to-income ratio make it difficult for you to qualify for the loan amount you want, the 40 Year mortgage might help you get approved. The lower monthly payment might be just enough to allow you to qualify for the mortgage amount you need. The added benefit of a fixed interest rate allows you to keep the loan as long as you want or need it without fear of rapidly escalating monthly payments. But – if you don't need this loan, stick with a 30 Year mortgage, either fixed or adjustable. You will be very happy you did when you refinance the loan or sell your home. Your equity will increase much more rapidly with the shorter term product.