What are 40-year mortgages?

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A 40-year mortgage is a home loan designed to be paid off in 40 years. It can get you lower monthly payments than a 30-year mortgage, but you’ll pay more interest throughout the life of the loan. Because mortgages with terms longer than 30 years are considered “unqualified,” they can be difficult to find.

How do 40-year mortgages work?

Beyond the longer term, 40-year mortgages function similar to other kinds of mortgages. You can get one with a fixed interest rate, or one with a rate that changes over time.

  • Fixed-rate mortgage: With a 40-year fixed-rate mortgage, you get a fixed interest rate that doesn’t change throughout the life of the loan, so you know what each monthly payment would be. It works just like a 30-year fixed-rate mortgage or a 15-year fixed-rate mortgage; however, you stretch the payment schedule for 40 years.
  • Adjustable-rate mortgage: With a 40-year adjustable-rate mortgage (ARM), your interest rate can fluctuate throughout the life of the loan. Forty-year ARMs are built like their shorter-term counterparts. A 5/1 ARM, for instance, gets you a fixed interest rate for the first five years of the loan. Afterward, the rate readjusts once every year for the remainder of the 40-year term.
  • Interest-only loan: Some lenders may allow you to take out a 40-year mortgage that requires only interest payments during the first few years, typically 10. Afterward, the loan effectively becomes a 30-year fixed-rate mortgage. The benefit is even smaller monthly payments — but, the trade-off is risky, because you build no home equity within the first decade, and you may run the risk of default down the road by not chipping off any of the loan principal for the first 10 years.
  • Balloon payment: Even rarer and riskier is a 40-year mortgage with a balloon payment. With this type of loan, you begin making regular payments as you would with a 40-year fixed-rate mortgage, but you owe the entire balance at the end of year 30. At that point, you make a substantially larger “balloon payment” to pay off your mortgage. If you can’t afford to cover that payment by year 30, you may sink into default. Federal law enacted following the Great Recession generally banned balloon payments across the industry.

Benefits of a 40-year mortgage

The main benefit of a 40-year mortgage is a smaller monthly mortgage payment. Say you’re buying a $200,000 home with a 4 percent fixed interest rate and a 20 percent down payment. Comparing a 30-year mortgage to a 40-year mortgage, with a 40-year mortgage, you’ll save close to $100 a month on your payment.

Comparing a 30-year mortgage to a 40-year mortgage overall, however, there’s a considerable cost difference over the term.

Risks of a 40-year mortgage

The allure of smaller monthly payments can entice you, especially if you’re a first-time homebuyer, but paying more interest over a longer term may not be the best trade-off for everyone.

“Despite the monthly payment reduction, if you are to pay these loans through the life of the term, the 40-year increases your total payments by tens of thousands more,” explains Steven Ho, senior loan officer with the digital bank Quontic. “The best thing is to understand your budget and see what works for you in the short term versus the long term.”

In the above example, the total interest paid on the 30-year loan is $114,993. On the 40-year loan, that rises to $160,978. Your total payment on the 30-year mortgage is $274,993, but with a 40-year mortgage, that jumps to $320,978 — a difference of $45,985.

We used a fixed interest rate of 4 percent for both loans. Because lenders take on more risk by giving you more time with a 40-year term, they may have higher interest rates in a real scenario.

“With interest rates being much higher on a 40-year mortgage, that will ultimately bring up the overall cost of the loan,” says Matt Edstrom, CMO of GoodLife Home Loans in Laguna Hills, California.

To put that into perspective: If the interest rate were 4.5 percent, instead of 4 percent, your monthly payment savings on a 40-year mortgage drop to just $45.

In addition, with a 40-year mortgage, you may not have access to much of your home’s equity within the first few decades of making timely mortgage payments. The rate of building equity with a 40-year, interest-only loan is even slower, because you’d be paying zero principal for a certain number of years. If you need cash, building up equity matters, because you can borrow against your equity by taking out a home equity loan or a home equity line of credit (HELOC).

Moreover, lenders of 40-year mortgages may impose strict qualification guidelines on these products in order to mitigate their risk. So, you may need a higher credit score and a lower debt-to-income ratio to qualify for a 40-year mortgage than you would for a 30- or 15-year mortgage.

“I wouldn’t recommend 40-year mortgages unless it’s the only way you’ll be able to pay for what you need,” says Edstrom. “Some might consider it just so they can stretch those payments out in order to afford a home that might normally be out of their price range.”

Where can you find a 40-year mortgage?

The Consumer Financial Protection Bureau (CFPB) classifies mortgages with terms longer than 30 years as “unqualified,” so most established banks and lenders don’t offer them. A “qualified” mortgage is one that meets certain standards set to ensure consumers can reasonably afford the loan.

Some smaller banks and credit unions may offer them, however, so carefully vet the lenders that do. Make sure you compare current rates, and be cautious if you get an offer with a rate that’s considerably higher than current rates. Ask your lender what the down payment requirements are, and for details on any fees, including prepayment penalties.

Alternatives to 40-year mortgages

If you’re seeking lower monthly payments, you have options. Your lender may allow you to pay mortgage points or discount points up-front to reduce your interest rate, which trims your monthly payment moving forward.

A 30-year fixed-rate mortgage may come with a slightly higher monthly payment, but more in savings throughout the life of the loan. You might also consider a shorter-term ARM. This may offer smaller loan rates at the beginning of your term. As you save more and improve your credit, you can refinance into a favorable fixed-rate mortgage before your ARM resets.

Overall, 40-year mortgages can be riskier than their more common counterparts, like 30-year or 15-year mortgages, so carefully weigh the pros and cons.

Featured image by Laurie LaPorte of Getty Images.

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