I read a press release other day which points to fact we need to be very careful with our finances. The subject of release was home mortgages. A company was announcing availability of 40 year mortgages for its customers. The stated purpose was to lower monthly payments to make buying a home more affordable.Whenever I hear phrase “more affordable”, I put my hand on my wallet because attempt to empty it will begin any moment. Almost never is that phrase used in relation to total cost of financing. It is always used in reference to size of monthly payment, as in this example.
Let’s see what it really means. I did math. A mortgage for a $100,000 home at 6% for 30 years would have a monthly payment of about $600 for principal and interest. You would pay about $216,000 over life of loan of which $116,000 would be interest..
A mortgage on that same home for 40 years would be at 6.25%, with a monthly payment of $565. The payments over life of loan would total about $271,200 and $171,200 of total would be interest.
The forty year mortgage has a higher interest rate (usually between.25 and .50 percent) because lender has his money at risk for a longer time (Lenders are well aware that time is money. You should be as aware).