40 Year Mortage Risky Choice?

40-Year Mortgage- Risky Choice ?
Greg McBride, CFA Bankrate.com
The primary advantage of a 40-yr. fixed rate mortgage is making
monthly payments more affordable without taking on the risk of an
adjustable rate. It also appeals to buyers with small down
payments. Reducing the monthly payments on large loan amounts
is accomplished by stretching the repayment term by an extra 10
years.
But the difference in payments may not be as significant as you
might think. Consider that a $200k 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 payment by just over $100 to $1,065.78.
However, some of this effect of lower monthly payments is negated
by a higher rate that is charged on the 40 yr. loan. Rates are often
one quarter to one half of a percentage point higher than a 30 yr.
fixed rate. Another disadvantage is that the homeowner builds
equity at a snail’s pace. For first time buyers looking to eventually
move up to another, larger home, this slow equity accumulation is a
liability.
Consider a $200k, 40-yr. fixed rate mortgage vs. a 5/1 ARM for a
buyer with an intended five-yr horizon in the home. While the 5/1
ARM reduces the monthly payment by $57 compared to the 40 yr.
fixed, the ARM borrower accumulates an additional $10k in equity
during that five year period.
Mortgage Payment Loan Balance After 5 yrs.
5/1 ARM @ 4.75% $1043.29 $182,996.47
40 yr. fixed @ 6% $1100.43 $192,993.19