Yes. Basically the rule is the longer you tie up their money, the higher the interest rate. It offsets the possibility that rates go up and they can’t lend at the higher rate because its not paid off yet. Additionally, their exposure to having to possibly foreclose is longer.
I’m in the middle of refinancing a rehab that I just finished and intend to live in for a while. I’m being offered a 40 year mortgage vs a 30 year mortgage. Which is better?
Re: 40 yr. vs 30 yr. mtg. Which is better? - Posted by Ed Garcia
Posted by Ed Garcia on August 02, 2007 at 07:16:36:
IB,
When we determine our financing, itâ??s to do the job that best suits us.
The average home buyer either moves or refinances in 6 years.
You have already ear marked this house as a rehab to live in short term, and then either sell or keep as a rental.
If I intend to sell, then I would do the forty year for the lowest payment, knowing the loan will be short term. If I intend to hold the property, I would go 30 years giving me a self liquidating loan that will eventually be paid off by the tenants. This will give me residual income when I retire.
If the interest paid on a 15 yr is 1/4 that paid on a 30 yr, then a 40 yr is even worse. Plus the higher interest rate. I have explored the 40 yr a number of times and always walk away. The 30 yr is a good balance between monthly payments (which hits your cash flow) and interest payments.
personally, I prefer 15 year ams. I get a lower interest rate. and its kind of a forced savings plan. I have to keep my operation lean and mean to be able to tolerate the shorter ams. and I’ll thank myself several million times when these bad boys start coming off mortgage in 8-14 years…