06/04/2023
A Realtor buddy of mine, Mike Aaron Reeves , made a post discussing the FHA Approved 40 year loans today and it got me thinking about the real costs associated with extending your loan by 10 years.
If you are considering a 40 year mortgage, please read this and understand what you are signing up for.
**TLDR version at the bottom under CONCLUSION**
I made a whole spreadsheet that I will share if anyone wants to look at it in more detail, but here are the highlights.
This example is FHA $400k purchase price with 6% APR, with .55%/year standard MIP and $1800/yr insurance, and $5000/year property taxes. (Both will change over time, usually up, but they are consistent for these 40 years to make the math consistent.) This also doesn't take into account that you will usually have a HIGHER interest rate if you increase the number of years of repayment...
Monthly Payments:
40 year- $2904
30 year- $3098
Year 1:
Save: $1743.96
Equity Lost (end of year balances): $1779.24
By Year 3 you owe $6,933 more on your home with a 40 year vs 30 year, but you have saved $6,374 in payments over the 2 years, so almost a wash (lost $559 over 3 years).
At this point... if you have not refinanced, it starts to get ugly.
Year 5: You have lost $2703 ($15,919 lost equity, $13,215 saved in payments)
Year 10:
40 year mortgage has paid off just over 9% of their loan and owes $357,140
30 year mortgage has paid off almost 18% of their loan and owes $322,148.
$34,992 behind in equity, saved $24,270 in payments, down $10,721 overall.
This doesn't sound too terrible yet, until you consider that if housing prices had remained perfectly constant, the 30 year mortgage is almost to that magic 20% equity number and likely has more refinance/MIP removal options... MIP for this example is $176.92 per month that it stays.
30 year hits 20% in the 11th year.
40 year hits it in the 18th year.
$176.92 per month x 7 years = $14,861 EXTRA savings if the 30 year is able to get it removed.
By 20 years:
40 year owes $295,638
30 year owes $200,217
Total loss calculating equity lost (95,420) vs Total of Yearly Mortgage savings ($44,488.81) is now over $50k ($50,931.95)
Year 31:
30 year is done with principal and interest and is now paying $6800 year in property taxes and insurance ($567/month). They can sell their house and it's all profit (minus closing costs)
40 year has paid off just 53.22% of their balance and still owes $183,741. They must pay this off if they sell.
The $60,000 that were saved in mortgage payments over 30 years is likely not all saved/invested properly because lets face it, we arent taught to be wise with our money, and now you have 10 more years of payments to pay, totalling $308,795.30, AND if you sell you are losing money paying back the bank.
Balance at 35 years: $97,067.84 (75.29% paid off)
***CONCLUSION: ***
On top of the obvious EQUITY LOSS and owing more if/when you sell issues, the total spent is wild.
On a $400k home, you spend an extra $274,644.83 by spreading it out the extra 10 years. All to save $193.78 per month. For most people that can afford a $400k home, that is less than working 1 extra shift per MONTH, and giving away over a quarter million dollars.
Idc if you are using me as your Realtor or someone else... Please please please avoid 40 year mortgages if you can help it at all.
If you MUST get a 40 year mortgage, you should have a plan to refinance in the first 3 years and know about closing costs and what your payment will jump to when you refinance to 30 years (or less).
*Hops off soap box* Have a good day!
