Thanks to rising interest rates, buying a home is now very expensive. The Federal Housing Association office has approved the use of 40-year mortgages to make owning a home more affordable. The idea is to lower payments, making it more affordable month-to-month to afford to buy a home.
Lower payments sound great, but one finance TikToker is not convinced that these loans are such a great idea.
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"HUD introduces the 40-year FHA mortgage. On the surface, it’s meant to help with monthly payments," explains johnsfinancetips creator John Liang. "However, this now increases the overall interest paid on the entire loan."
Liang illustrates a conversation between two fictional HUD employees discussing the new practice to show how it can affect buyers in the long run.
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Financial influencer Liang points out that these lenders end up collecting an obscene amount in interest over that additional decade. If you couldn't keep up with the mental math, here are all his calculations.
"Right now a 30-year FHA loan for $500,000 at 6.7% interest would cost $3500 bucks a month. What if instead, we allowed a 40-year loan option that would only be $3,280 a month, saving them $220 bucks," Liang explains. "Well, with that $500,000 loan over 30 years, they would have paid $661,000 in interest. Over 40 years, they would pay $939,000. Just in interest, folks."
Yikes. That's $278,000 more added to the cost of a home. Liang also points out that this is similar to financing at car dealerships.
Liang's point has been similarly echoed by Dave Ramsey in the past, who wrote on the Ramsey Solutions blog in 2021, "Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for 15 more years and pay thousands of dollars more for the privilege."
