Paying your mortgage off quickly is important, but how important? That is the question. Banks these days are marketing and promoting mortgage loans up to 40 years. The 30 years slavery they created is no longer enough for the financial world’s greed, now they want 40 years of your life!! When is enough, well, enough?
We at Saving For Hope decided that it was time to post an article about this mortgage crisis. Families are losing way too much money in interest paying off loans, credit cards, car loan, student loans, etc. Paying for an extra 10 or 20 years on mortgage payments is dangerous. The difference of a 30 to 40 years loan is added interest, that is sold and marketed to consumers as something beneficial. But the truth is that a 40 years loan is literally, flushing your money down the toilet. Click To Tweet
Here in this article, we put together a few facts about a 40 years mortgage loan, to show you how much of a waste of money they are.
First, a 40 years mortgage has on average between 40 to 42 percent increase in interests paid over the life of the mortgage. Put in simple terms, if you paid $100,000 in interest on a 30 years mortgage, for the same loan amount, you will pay $40,000 more for the extra 10 years. That is insane!!
Second, Banks are marketing these loans with the promises of a lower monthly payment, which in turn gives your household better monthly cash flow. In theory this argument sounds great. On average the monthly increase is about 8%. But consider this, is an 8 to 10% increase in monthly cashflow a good trade off to 40 to 42% more in interest? I don’t think so! Now there are cases when the 40 years loan makes sense. For example, a family on a job transfer that relocates to a city for 2 to 3 years. They buy a home knowing they will only live in that city for a short period of time and after that short period of time, the family sells the house to relocate to a different city. These types of scenarios are not common, but in these rare cases a 40 fixed mortgage could be a positive choice (We tend to disagree in general, but there are some exceptions to the rules).
However, for the rest of us mortals, the 40 years slavery should never be even an option. Banks are marketing this to get 40% more money out of you, period! There is no benefit to the consumer, the banks are the only ones benefiting from such commitments.
Third, another added aggravation of a long mortgage is the PMI insurance. PMI is calculated based on the amount of the loan versus the value of the house. Often times, if you owe more than 80% of the value of the home to the bank, you have to pay for this insurance. That is monthly expense that will not go away until the value goes down. On a 40 years mortgage it takes way longer for you to pay off the principal amount of the house. That means you will have the PMI insurance for way longer than if you had a 30 years mortgage. This can equate to more money for the banks and insurance companies and lees money for your family.
Finally, instead of getting into the hype of a 40- years loan (with the promises that you will have more cash each month) consider instead of doing your homework about how much house you can really afford. Click To Tweet If you need a 40 years loan to be able to afford the monthly payments, more likely than not, you are getting a house you can’t afford. We recommend that you use a mortgage calculator before you purchase a home. That way you can play around with monthly payment ranges and see firsthand how much money you can pay to live a comfortable lifestyle.
Instead of getting yourself into a complete financial mess, maybe it is better to start with a different perspective. Buy what you can afford! We at Saving For Hope recommend always going with a shorter fixed mortgage loan, like a 15 years or a 20 years, to save as much money as possible, to pay the house as quick as possible. This means really living according to your means and being able to recognize your limits.
Take your time, do your research, and pick a mortgage that makes sense and helps your family in the long run. Don’t let the banks owe your life. Break free and as always, ENJOY!