LITTLE ROCK, Ark. (KARK) — As the housing market in central Arkansas booms, 40-year mortgages are becoming more popular, but financial experts, and even real estate brokers, warn would-be homeowners against this kind of financing.
“We all have champagne tastes in a beer budget,’ said real estate broker Claire Brown.
That trap is why economists say 40-year loans are becoming more popular.
“Because compared to a 30-year conventional mortgage, you can have a smaller monthly payment to afford the same value of home,” said Dr. Michael Pakko, Chief Economist at the Arkansas Economic Development Institute at U of A Little Rock.
Dr. Pakko says people tend to focus just on their monthly payments.
“So many people are short-term oriented,’ Pakko said.
But this type of financing comes with trade-offs.
“You end up paying much more interest over the life of the loan,” Pakko said.
Real estate brokers agree. “If it sounds too good to be true, then it typically is,” Brown said.
The longer the term, the more money you’ll have to dish out.
“We allow our emotions and our excitement about home ownership to make us jump into more financial debt than we really need to be in for the long term,” Brown said.
Dr. Pakko says typically, if you need to extend the terms to a 40-year or longer mortgage, you really need to ask yourself if you can afford that home.
“And often times the answer will be no,” Pakko said. “Think about what other things you might be able to do with that money.”
The bottom line, Brown says, is to not let the market dictate your decisions.
Buy what you can truly afford and use logic, not emotion, while signing that dotted line.
Financial experts say you can expect to pay at least an extra .25% on interest on a 40-year mortgage than you would on a 30-year plan.