Remedial Math

I receive alerts from Wells Fargo when mortgage rates fluctuate.

I find it odd and a bit disturbing that people are still offering 40-year mortgages. I know no one actually stays in a home for even the traditional 30-year term; that’s not the point.

There’s a reason your typical mortgage maxes out at 30 years: it is the point at which diminishing returns really start to rear their head.

Example: For a $200,000 loan at 5.5% (the current 20- and 30-year rate), here are your payments.

20 year term - $1375.77
30 year term – $1135.58 (savings of $240.19 per month, or 17.5% from 20 year term)
40 year term - $1031.54 (savings of $104.04 per month, or 9.2% from 30 year term)

Going to 40 doesn’t help much, does it?

But now let’s put in the ACTUAL 40-year rate—a big fat 6.75%:

30 years at 5.5% - $1135.58
40 years at 6.75% - $1206.71

Yes, a 40-year mortgage actually costs more each month than a 30-year mortgage.

Why is this even an option?