40-year plan

Entrepreneur, Sept, 2005 by Jennifer Pellet

Looking to make your monthly mortgage payment more affordable? Adding 10 years to the typical 30-year mortgage can significantly reduce your payments.

Low interest rates have made 40-year mortgages relatively rare in recent years. "Now, as rates trend upward, you will see the re-emergence of that product," predicts Jon Eberhardt, president of the California Association of Mortgage Brokers in Sacramento, California. He notes that 40-year loan terms are usually employed in starter-home situations or used by people who wish to have a reduced payment option. "People use them to lower payments and qualify for houses they would otherwise not be able to buy."

The downside? Longer-term mortgages can be difficult to find, interest rates are .10 to .25 points higher than rates on 30-year loans, and borrowers pay more in interest over the life of the loan. "You wouldn't want a 40-year term if you wanted to pay down the principal," asserts Eberhardt. "Home buyers use it to qualify for more [money] and get the lowest possible interest rate at the outset. Then, after three years, they change over."

JENNIFER PELLET (jpellet@inkstoneeditorial.com) is a New York City freelance writer specializing in business and finance.