What is better – a 40-year fixed or a 40-year Interest Only mortgage?


What is the point of having a 40-year interest only mortgage at all? Lenders are using 40-year fixed rate loans to make the monthly payment more affordable. With a 30-year interest-only home loan you already have a lower monthly payment.

Also, a 40-year fixed rate mortgage (FRM) will have lower rates than the 40-year IO, unless the latter is adjustable rate. But why would anyone need an ARM with interest-only option for 5 to 15 years and up to 35 years remaining to amortize with a fluctuating payment? This truly makes no sense, not even with a refinance on mind. 40-year FRMs will have higher rate than the 30-year FRM and a 40-year IO will have even higher rate.

30 vs 40-Year Fixed and Interest Only Mortgage Comparison

$200,000 loan amount 30-Year Fixed 30-Year Interest Only 40-Year Fixed 40-Year IO
Interest Rate 6.25% 6.5% 6.5% 6.75%
Monthly Principal & Interest $1231 $1171
Monthly Interest $1083 $1125

Note that for demo purposes the interest rate difference is pretty straightforward. In real life, rates would vary more or less. That is to say, your monthly savings on a 40-year IO to a 40-year interest only may be even less than the $46 dollar difference you are seeing now.

On the current example, while on a 30-year Interest Only compared to a 30-year FRM there is effective monthly savings of $150 the benefits of a 40-year IO over the 40-year fixed are negligible.

This is the type of comparison one should run when thinking of 30- and 40-year standard and interest only mortgage. Current rates may vary but a 30-year fixed is less expensive than a 30-year IO and 40-year fixed is more expensive than a 30-year loan of the same type.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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