Mortgage payments are the highest monthly expense for most households. If you want to purchase a home but worry that doing so will stretch your budget thin, a 40-year mortgage could be ideal. It stretches your loan payments over an extended period, which could make them more manageable. But this loan product isn’t without drawbacks. Here’s what you need to know about 40-year mortgages to make an informed decision.
What Is A 40-Year Mortgage?
As the name implies, a 40-year mortgage is a home loan product with a repayment period spanning this timeframe. It features smaller monthly payments but increased borrowing costs than its traditional 30- and 15-year mortgage counterparts, as the lender has more time to collect interest from you.
How Does a 40-Year Mortgage Work?
When you take out a 40-year mortgage, the lender approves you for a set amount to purchase a home. Once the loan closes, the proceeds are paid directly to the seller, and you make monthly installment payments to the lender over 40 years.
If you get a fixed interest rate, you’ll pay the same amount in principal and interest over the loan term. However, a variable-rate loan means you can expect fluctuations during repayment.
Either way, this longer amortization schedule results in lower monthly payments, which can make homeownership more attainable for some buyers. Still, you’ll end up paying more over time in total interest compared to shorter-term mortgages. More on this shortly.
Pros And Cons Of A 40-Year Mortgage
The idea of a lengthy term on a home loan may be appealing, but there are also drawbacks to consider.
Pros
Reduced Monthly Payments
With a 40-year mortgage, your loan amortization period is stretched over an additional decade relative to the standard 30-year mortgage, generally leading to reduced monthly payments. A lower monthly mortgage payment can mean more wiggle room in your budget to meet other important financial goals.
Potential Tax Benefits
A lengthy repayment period can translate into more significant tax deductions over the life of the loan. Your mortgage interest deduction could reduce your taxable income annually, though it’s always best to consult a tax professional regarding your situation.
Alternative Loan Structures
A 40-year mortgage isn’t just a more extended version of a 30-year mortgage. It can come with alternative loan structures, such as an adjustable-rate mortgage (ARM) that provides an initial lower fixed rate before becoming variable to make your loan payment more manageable. If you plan to relocate or refinance soon, an ARM may be suitable.
Cons
Higher Interest and Total Cost
Borrowing costs with a 40-year mortgage will be higher than a traditional 30-year term. Extending the repayment period by another decade means interest accrues over a longer time. To illustrate, assume you take out a 40-year mortgage for $400,000 with a 7% fixed interest rate. You’d pay $793,148.06 in interest costs over the life of the loan. But if you opt for a 30-year mortgage, this figure drops to $558,035.59.
Slower Equity Building
With lengthier mortgage terms, your monthly payments are spread out over more installments, meaning a smaller portion initially goes to principal reduction. You build equity in your home at a slower pace than you would with a shorter-term mortgage. This could have a negative impact if you decide to move or borrow against your home’s equity in the near future.
May Be Hard to Find
While a 40-year mortgage can offer lower monthly payments, this type of loan is less common and is harder to find. Lenders often provide more traditional loan terms, so expect limited options when shopping around.
Reasons To Get 40-Year Mortgage
There are several reasons why a 40-year mortgage could make sense for your financial situation. For many borrowers, lower monthly payments are the primary draw, as they could be the difference between buying a home or continuing to sit on the sidelines. And if you’re aiming to buy a higher-priced home, the lower payments associated with a 40-year mortgage could make it feasible for you to afford a more expensive property.
Smaller payments also give you more flexibility in your monthly budget. This can be especially appealing if you anticipate future income growth but need more cash flow currently for other investments or expenses. If you expect your finances to improve, starting with a 40-year mortgage could be a strategic move. You may have the opportunity to refinance to a loan with a shorter term in the future.
Some 40-year mortgages offer an interest-only period, reducing your payments further at the beginning of your loan term. Lower payments can provide a cushion as you settle into home ownership.
Where To Get 40-Year Mortgage
These home loan products are accessible through select conventional banks, credit unions and online mortgage lenders. If you’re having trouble finding 40-year mortgage products that work for you, consider working with a mortgage broker who can help you identify viable options.
Best Lenders for 40-Year Mortgage
When considering a 40-year mortgage, choosing a lender that offers competitive rates and terms on these loan products is vital.
Carrington Mortgage
Carrington Mortgage offers 40-year mortgages to make homeownership more accessible, particularly for borrowers looking for lower monthly payments. The lender introduced this loan product to tackle affordability challenges faced by borrowers.
Newrez (formerly Caliber Home Loans)
At Newrez, you can access a 40-year loan with competitive interest rates. The lender’s expertise and reputation make it a strong candidate for your mortgage needs.
How To Get 40-Year Mortgage?
The process is similar to securing a 30-year mortgage. Below is a step-by-step breakdown of how to move forward:
- Step 1: Shop around to find reputable lenders offering 40-year mortgages.
- Step 2: Get pre-approved with at least three lenders and compare loan quotes.
- Step 3: Formally apply with the lender you select and submit the required documents for underwriting.
- Step 4: Get a lending decision from the lender and tie up any loose ends with the lender.
- Step 5: Receive the clearance to close on your home.
- Step 6: Attend closing, remit funds due for the down payment and closing costs, and enjoy your new home.
Alternatives To 40-Year Mortgage
When you’re considering a mortgage for your home, the 40-year option can initially appear attractive due to its lower monthly payments. However, the long term comes with steep costs that could make alternatives more ideal.
Opt for a Lower-priced Home with a Shorter Term
Choosing a more affordable home lets you get a mortgage with a shorter term, such as the traditional 30-year fixed-rate mortgage. A shorter term results in higher monthly payments compared to a 40-year mortgage, but the overall interest paid over the life of the loan can be significantly less.
Get an FHA, VA or USDA Loan
These government-backed loans can be good alternatives to a 40-year mortgage due to their more favorable terms for qualifying borrowers. FHA loans are popular among first-time homebuyers and those with less-than-excellent credit, and they require a low down payment.
VA loans are available to veterans, active-duty service members, and some surviving spouses with no down payment requirements. USDA loans are for low- to moderate-income borrowers in eligible rural areas. They also offer low-interest rates with no down payment requirements.
Avail of an Adjustable-rate Mortgage
An adjustable-rate mortgage (ARM) might be a suitable option if you expect to stay in your home for a shorter period, such as less than five years. ARMs typically offer lower initial interest rates than fixed-rate mortgages, which can initially result in lower monthly payments. That said, the rate can change over time based on market conditions.
Buy Discount Points
You can purchase discount points to reduce your mortgage interest rate. Each discount point costs 1% of your loan amount and typically lowers your interest rate by 0.25%. Although you will pay more upfront, the cost savings over time may be well worth it.
FAQs About 40-Year Mortgage
No, FHA loans do not offer a 40-year term. The Federal Housing Administration (FHA), which is a part of the United States Department of Housing and Urban Development (HUD), caps loan terms at 30 years. As a borrower, your options for a longer-term mortgage would be with conventional lenders that might offer such products, possibly following the guidelines of entities like Fannie Mae or Freddie Mac.
An interest-only mortgage allows you to pay just the interest on the loan for a set period at the beginning of the mortgage term. With a 40-year interest-only mortgage, you make interest payments for a portion of the term, which could be for the first ten years, and then pay off the principal over the remaining 30 years.
This type of mortgage can significantly lower your initial payments but result in higher costs over the life of the loan.
The rates on 40-year mortgages are typically higher than those for shorter-term loans. The interest rate on a 40-year loan is set based on various financial factors and remains consistent across the term of a fixed-rate mortgage or varies for an adjustable-rate mortgage (ARM).
Your monthly payments are lower because the loan balance spans a longer period, but you will pay more in interest overall.
Yes, there can be special requirements for a 40-year mortgage. Borrowers may find they need to meet more stringent credit qualifications. They may also face higher interest rates and down payment requirements compared to shorter-term loans.
Lenders also consider debt-to-income ratios and employment history when evaluating eligibility for a 40-year loan.
