In order to afford “more house” for lower monthly payments, many people are trying to stretch their mortgage payment term 10 years longer, to a 40-year mortgage. For some people, who are trying to “upgrade” this may seem like a good idea. But MSNBC points out that it may not be the best of ideas—and it doesn’t reduce your mortgage payment by too much:

But the difference in payments may not be as significant as you might think. Consider that a $200,000 mortgage financed for 30 years at a fixed rate of 5.75% carries a monthly payment of $1,167.15. All else being equal, stretching the loan term an additional 10 years reduces the monthly payment by just over $100 to $1,065.78.

Not only is the mortgage payment not particularly lower, but there are also other problems with the 40-year mortgage. First of all, any advantage is likely to be wiped out by the higher interest rate. Take between .25 and .50 points higher on the rate, and spread it out over the entire 40 years, and you can see how it compounds.

Finally, it is worth noting that your equity will build at a slow pace. And if you did not put 20 percent down initially, it would take even longer to begin building equity. More of your money will go to interest initially, and your balance will barely move down, while your home remains devoid of equity.

Tags: 40-year mortgage, mortgage payment, mortgage payment term, finances,
financial goals, interest rate