One of the worst imports we’ve got from the U.S. is the recently marketed 40-year mortgages. But according to the last RBC Homeowner Survey, almost half of all first-time homebuyers are taking this term!
Here’s the bottom line: It’s purchasing a dream home and making it into a financial prison.
Let’s look at the implications for a minute: Just a relatively small $250,000 mortgage over 40-years stretches the payments by another 15 years and drops them only $235. That might seem like a good idea until you do the math, because this small amount of breathing room each month comes with a very high cost of over $177,000 in extra interest.
On this $250,000 mortgage, the total you’d be paying back is $660,000. Now remember that this is net income you use to pay your bills. So in a tax bracket of around 30% you’d need to earn just under one million dollars just to pay off this mortgage. And after ten long years of payments, you’ve barely paid off $20,000 of principal!
Oh – and if you’re past your 20s, a 40-year mortgage likely means you’ll die never having paid it off and having made payments for an entire lifetime. THAT is not a recipe for financial success.
We do whatever it takes to get that home and stop thinking, planning and being realistic about the debt we’re taking on. And I guarantee almost everyone who needs to take a 40 year mortgage won’t be saving anything for retirement or an emergency. Every new homeowner also needs the money for the tax adjustment, legal bill, interest adjustment, buying a lawn mower and the basic homeowner stuff and that $5,000 or $6,000 goes on a credit card or line of credit and immediately forces another $200 payment.
-purchase a home for a lower selling price
-pay off one of your current bills to get your budget in line
-save a little longer, harder and more to increase your down payment by another 5%
-will your parents help out? NOT with a loan – that’s just making something bad – worse but with a gift of some down-payment to help you not kill yourself with payments and debt?
As with any borrowing: Just because you can – doesn’t mean you should!