Equity Slow to Build on Long-Term Mortgages

Lower monthly payments and tax benefits make this an attractive option for some buyers who either can’t afford more or don’t want so much of their monthly income tied to their house payment. The downside of this is they are paying a lot more interest over the life of the loan and building very little equity for a long period. Since most people don’t keep their homes very long anyway, it isn’t much better than a no interest loan.

Some borrowers don’t realize that most of the long term loans don’t have a fixed interest rate. Usually after about five years, the rate can be adjusted annually with a balloon payment at the end of 30 years.

An example of a 30 year fixed versus one of the 40 year loans:

$275,000 for 30 years at 6.75% = monthly payments of $1,783.64 and pay $367,112 interest over the term of the loan.

$275,000 for 40 years at 7% = monthly payment of $1,708.93 and pay $545,290 interest over the life of the loan.

If it were a 50 year loan at 7.25% the monthly payment would be $1,707.45 and total interest would jump to $749,476.