With the increase in interest rates and home prices lenders are getting creative. Lately we are seeing the introduction of 40 year loans and now 50 year loans. While these sound better than an interest only loan, what is the truth?

I'll be honest, as I write this article I haven't actually compared these over a long term. I know that there are interest rate adjustments for most "add-ons", and that the longer the amortization (length of time it takes to repay a loan), the less principle (equity) that is applied to your loan balance.

This article will look at actual numbers for a "normal" borrower with several differet loan scenarios. We'll look at a 15 year fixed mortgage, 30 year fixed mortgage, 30 year fixed mortgage with interest only for 10 years, a 5 year ARM (fixed for 5 year than adjusts), a 5 year ARM with Interest Only, a 40 year mortgage and a 50 year mortgage (with a 3 year prepayment penalty). We'll make the assumption that the borrower can document income and assets and has a 680 credit score, the loan amount will be $100,000 with a loan to value of 80%. The reason for $100,000 is that it is easy for you to extrapolate for your situation. I have interviewed Larry Morris with Integrity Lending for this article. You can find other resources on how to choose the right loan product for you.

Here goes...

Program is the type and amortization period
Rate is the interest rate used to calculate the monthly payment
Payment is the monthly payment for principle and/or interest
5 Yr TI is the 5 year total interest paid
5 Yr TP is the 5 year total principle paid

Comparison Chart

Program ............. Rate ........ Payment ..... 5 Yr. TI .......... 5 Yr. TP
15 Yr .................. 5.875%.... $837.12....... $26,057.......... $24,170
30 Yr .................. 6.125%.... $607.61....... $29,654.......... $6,803
30 Yr IO .............. 6.375%.... $531.25....... $31,875.......... $0
5 Yr Arm ............. 5.875%.... $591.54....... $28,401.......... $7,091
5 Yr IO Arm ........ 6%........... $500........... $30,000.......... $0
40 Yr .................. 6.25%...... $567.74....... $30,770.......... $3,294
50 Yr. 3 Yr .......... 6.625%..... $573.15....... $32,895.......... $1,493

Sorry about the crude chart... : )

Based on the above anaylsis, over a 5 year period if you were looking for the smallest payment, the 5 Yr Interest Only ARM would be the best. It would be $ 73.15 per month less expensive than a 50 year loan and would actually be $1,402 less expensive over a 5 year period. While no principle is paid, the interest paid is less. It would also be $67.74 per month less than a 40 year loan. However, over 5 years the 40 year loan would accumulate a little equity ($66 per month).

If you can afford the 40 or 50 year payment you can most likely find a way to pay for a 30 year fixed rate mortgage. Even on a $300,000 mortgage that is only $120 per month more. If not, you're probably best off with a 5 year ARM or 30 year fixed interest only loan and do your best to pay extra towards the principle or invest elsewhere. (If you put an additional $100 per month into your 401k or an IRA you would most likely see a nice 5 year nest egg.)

Of course, you can always look for a less expensive home.....