Question:

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

Answer:

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.
Was this Mortgage QnA helpful?
Not at all
  • Currently 2.9/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: