40 year fixed rate mortgage: In debt for 40 years?

Written by Jesse Mecham  |  on


I ran into this article about 40 year fixed rate mortgages at Bankrate.com and I just couldn’t let it slide without a bit of comment.

Okay, so people are starting to look at 40 year mortgages because they want to squeeze a few extra bucks a month off their mortgage payment. According to the article, with a $200,000 loan, you’re looking at saving on your mortgage payment less than $64.

But how much is the extra ten years going to cost? In the first five years of your mortgage (and we all know that most mortgages don’t last much longer than 5 years), you’ll pay an extra $3,500 in interest. Oh, by the way, guess how much equity you built in your house during the first five years when you elect to stay in debt for 40? $6,500. More than $7,000 less than on a 30 year fixed-rate mortgage. Sheesh, if housing happens to be somewhat stagnant, you’ll be lucky to come out even a bit ahead after closing costs.

“It allows you the opportunity to have a lesser payment, and for many people it gives the luxury of choice,” says Jim Sahnger, a broker with Palm Beach Financial Network in Sewall’s Point, Fla.

Alright, first, Mr. Sahnger is a broker. He makes money when you take out a mortgage. I can promise you that selling you a 40 year fixed rate mortgage will be much more profitable than selling the 30 year counterpart.

No conflict of interest there.

What Mr. Sahnger says really burns me. He mentions that having a “lesser payment…gives the luxury of choice.” First of all – $64 measly dollars gives more choice? Okay… And second, since when has someone in debt had more choice than someone not in debt? When you are in debt you are obliged to pay, as the Bible says, you are “slave to the lender.” So who really has the luxury of choice in the long run? The person who choose to live debt-free. What does debt-free mean to me? Your house payment, on a 15-year fixed rate mortgage, is at most 25% of your take-home pay. Other than that, you shouldn’t owe anybody anything. And congratulations, you just found a house you can afford.

They will compete with interest-only mortgages. Those, too, were a niche product until home prices began zooming in parts of the country three or four years ago. Now interest-only loans occupy a big chunk of the mortgage market in high-price cities as buyers hunt desperately for ways to afford absurdly expensive houses.

And please, don’t get me started on interest-only mortgages! Alright, why are home prices zooming? Because sellers are willing to pay that price. Why are they willing to pay that price? Because their monthly payments are jimmied low enough using financial instruments such as interest-only mortgages or these 40 year fixed rate mortgages. So, buyers “hunt desperately for ways to afford absurdly expensive houses” (italics added).

That’s an interesting (and wrong) use of the word “afford”. The applicable definition of that words is as follows: “have the financial means to do something or buy something”. I’m sorry, but if you need to pay only interest for the first 3, 5, or 10 years of your mortgage, or if you have to stretch the payment to 40 years, you cannot afford the house you so desparely want. Think smaller, or continue renting until you have saved more money for a downpayment.

Being debt free will give you the “luxury of choice” you want so badly. Do not proceed to attach ankle weights to your legs before beginning a marathon, and please don’t take a 40 year mortgage to “afford” a house you can’t.

Your Next Step

Budgeting is not restrictive. You won’t be spending less, you’ll be spending right. So what do you have to lose? Except all that debt and stress?