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40 Year amortization Mortgage

40 year amortization mortgage loans have been around for a while but are becoming much more common. After Fannie Mae's trial period, many lenders are now offering their fixed rate 40 year amortization mortgage loan. Typically, lenders are making the 40 year mortgage available with a charge of 1% of your loan amount. This is a charge to your closing costs and not to your rate. You can either get the same rate as on your 30 year term and increase your closing costs or pay a slightly higher rate (usually .25% higher) and I can pay the cost for you from an increased yield spread premium. The big advantage to a 40 year mortgage is the ability to qualify for a larger home without the risk associated with interest only 40 year amortization mortgage. You have the safety of a fixed rate, no issue of recasting to a higher payment at the end of the interest only period, and qualify for a larger loan.

Lets look at some real world examples to see the savings comparing a 30 year and 40 year term based on a $250,000 mortgage

At 7% a 30 year term gives us a principal and interest payment of $1663.26
At 7% a 40 year term gives us a principal and interest payment of $1553.58 or a savings of $109.68
A 7% interest only loan gives us an interest payment of $1458.33 or a savings of $204.93 compared to the 30 year term but do not forget that there is some increased risk associated with the higher payment when the interest only period ends.

Another product series using a 40 year amortization mortgage loan term are the popular 40 Year Amortization Mortgage Option Arms. These products allow up to 4 different payment options, a minimum payment can be set to either a 30 or 40 year term, an interest only payment, fully amortizing 30 or 15 year terms. When I have a client who wishes to drive the minimum payment down to the lowest possible payment, the 40 year mortgage loan term is an excellent choice and is what I use on both my home and investment property. You will need to pay attention to the amount of deferred interest you are accumulating but the deferred interest can be a wonderful tool in tax planning. The way I look at my own loans is to view this feature as almost a free line of credit that I can use whenever needed. However, and this is an important point, an option arm is a poor choice if you are in an area where you have a slow housing market. As you are adding to your mortgage balance if you choose the minimum payment, you may be eroding the equity in your home. For more information on the amount of price appreciation needed to offset deferred interest please see the page on deferred interest.

I have developed an Adobe document detailing how this program works. Send me an  email requesting a copy of "Understanding the Option Arm".

Read more about 40 Year amortization Mortgage Closing Costs

I have added a website dedicated solely to the Option Arm.

Here is a useful  Option Arm payment calculator

    40 Year Amortization Mortgage Prequalify for your 40 Year Amortization Mortgage

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