|By Bradley Songer on November 22, 2010
A 40 year mortgage refinance is when an individual refinances their home with a lender over a 40 year period. This is a way for a borrower to handle high interest rates so that their monthly bill is more manageable – a decreased monthly bill is possible because the payment for the loan is spread out over a longer time frame. However, because of the increased time interval in which an individual would pay off the loan, the overall interest for the complete duration of the life of the loan is dramatically increased as well.
The Advantages to a 40 year mortgage refinance
There are a number of advantages for the borrower if they choose a 40 year mortgage refinance from a lender. The main benefit is lower monthly payments. A 40-year payment plan can reduce the monthly payment by over $100-200 or more, depending on the amount of the original loan borrowed from a lender. The secondary advantage to a 40 year mortgage refinance would be the ability to buy a higher priced home while paying the same amount per month as a cheaper home, just by spreading out the loan payments. This is usually the case when the borrower can only afford a certain allocation per month; in other words, they can only a pay a specific amount of money per month for the duration of their loan. For example, when rates were 5%, a borrower could afford to buy a house for $1,000 a month – now that rates have increased to 7%, a borrower is unable to afford that same $1,000. Therefore, by spreading out the loan duration to 40 years, the borrower is able to buy their home while staying in the $1,000 budget.
The Disadvantages to a 40 year mortgage refinance
The main disadvantage for 40 year mortgage refinance loans is the amount of interest that is accumulated during the 40 year time period. The total amount of interest that may be applied to the mortgage could easily reach up to 80% of the initial borrowed amount. Thus, only $50 a month would be being used to pay off the principal amount – and the other $950 would be used to pay off the accumulated interest on the given loan. In order to combat this accumulated interest the borrower may foresee themselves having an increased salary and annual income in the future, thus being able to pay more than the minimum monthly payment – paying off the loan in a shorter amount of time, resulting in less accumulated interest.