You can get a VA loan for 30 years, and you can get a VA mortgage for 15 years, but you can’t get VA financing for 40 years. What’s up with that?
Until the past few days, you might have gotten a non-VA mortgage with a 40-year-term, but that’s no longer possible under new rules just issued by the federal government. From this point forward, the longest new home mortgage is effectively limited to 30 years.
It’s not surprising that the entire mortgage system has now adopted still another one of the common-sense rules which have long guided the VA loan program. To understand why, let’s look at some numbers.
Imagine that you borrow $150,000 with a fixed-interest rate of 3.5% percent. Over 30 years your monthly cost for principal and interest will be $673.57. With a 15-year mortgage the monthly cost for the same loan amount with the same interest rate would be $1,072.32.
Given equal loan amounts and equal interest levels we can reduce monthly payments by stretching the loan term. So, if 30 years gives us a significantly lower payment than a 15-year mortgage, why should we not go to 40 years? After all, with a 40-year mortgage, our monthly cost for principal and interest would dip to a very affordable $581.09.
To answer this question we have to look at potential interest costs, the question of how much interest we would pay if we held the loan for its entire term. The lifetime interest numbers look like this:
- 15-year mortgage: $43,017.60
- 30-year mortgage: $92,485.20
- 40-year mortgage: $128,923.20
In effect, with a 40-year mortgage, we trade low monthly payments for tiny debt reductions each month. This may sound attractive from an affordability perspective, but when it comes time to repay, far more will be due at closing with a 40-year loan than a mortgage with has a term of 15 or 30 years. In fact, here’s how much would be owed at the end of 10 years for each loan alternative:
- 15-year mortgage: $58,946.14
- 30-year mortgage: $116,139.89
- 40-year mortgage: $129,404.50
The government’s decision to get rid of 40-year mortgages is based on the idea that there’s simply less risk for both borrowers and lenders when mortgages are paid down in a timely fashion. As the VA mortgage program has shown, 30 years is long enough.
Photo courtesy peretzpup