40-Year Ams...Pros/Cons
Million Dollar Journey says "if you can't afford a 25-year mortgage on the home that you want, then the home is too expensive."
For some clients, and in some markets, there's truth to that. Moreover, it's also important to note that, versus 25-year amortizations, 40-year Ams. cost you:
- Considerably more interest
- 0.6% more in insurance premiums if loan-to-value > 80%
- Interest on those premiums (usually)
- Potentially higher pre-payment penalties
In some cases, however, 40-year Ams. are warranted.
In high demand areas for example (e.g. Vancouver, Calgary, Toronto), inflated prices leave many buyers little choice but to up their amortization. (This assumes they don't want to rent, which can also be a good economic choice.) We continually see clients who would never get approved without a 40-year Am.--because it lowers their payments--and debt ratios)
40-year Ams. are also good for folks with uncertain incomes. In this case, a longer amortization allows for lower payments--which helps people weather dips in income. When times are good they can make prepayments to bring their Ams. down to 25 years or less.
It's also important to note that 40-year Ams. are sometimes great for investment/income property buyers. Rental clients use them frequently because:
a) The extra interest is tax deductible
b) It's easier to generate a positive cash flow
c) It allows them to reinvest in the property, or in other assets
