What are 40-year mortgages?

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When comparing mortgage rates, the two most common loan terms are 15 and 30 years. There is, however, a way to stretch that payoff window even further: a 40-year mortgage. This extended mortgage comes with lower monthly payments, but the additional decade means you’ll pay a significant amount more in interest over the life of the loan.

Can you get a 40-year mortgage?

It’s possible to get a 40-year mortgage, but it might not be easy to find, because many mortgage lenders don’t offer it in their suite of loan programs.

COVID-19 relief: 40-year mortgage modification

If you have a mortgage but are having trouble paying it back, there is currently the option to explore a 40-year mortgage modification. The economic fallout from the pandemic has created significant challenges for many homeowners, so the government has allowed borrowers with Fannie Mae- and Freddie Mac-backed loans to obtain a loan modification — through the Flex Modification program — to extend the term to 40 years. In some cases, borrowers might qualify for a lower interest rate, too.

This relief, though, is geared toward the nearly two million Americans who are unable to make their payments.

How do 40-year mortgages work?

Forty-year mortgages, like other home loan offerings, come in a variety of flavors that can impact your payment. You can get one with a fixed interest rate, for example, or one with a rate that changes over time. Here are some options:

  • Fixed-rate mortgage – Just like with a 15- or 30-year fixed-rate mortgage, your monthly mortgage payment stays the same throughout the 40-year life of the loan, thanks to a fixed interest rate that doesn’t adjust or change.
  • Adjustable-rate mortgage (ARM) – With a 40-year ARM, your interest rate can fluctuate throughout the life of the loan. For example, you might start off paying 4 percent for the first five years. Then, every five years, your rate adjusts in line with the market. These adjustments might come with maximum rate increases — 5 percent over the life of the loan, say — which can dramatically change how much you pay. Couple that with a longer loan term, and you raise your risk of more rate hikes.
  • Interest-only loan – Some lenders might allow you to take out a 40-year mortgage that requires only interest payments during the first 10 years. Afterward, the loan effectively becomes a 30-year fixed-rate mortgage. The benefit is even smaller monthly payments upfront — but the trade-off is risky, because you build no home equity within the first decade (unless your home climbs in value). What’s more, you run the risk of default by not chipping off any of the loan principal for the first 10 years, and the risk of needing to pay a higher interest rate after 10 years.

30-year mortgage vs. 40-year mortgage

Here’s how the math breaks down between a 30-year and 40-year mortgage. This example doesn’t factor other costs you’ll need to pay as a homeowner, such as homeowners insurance and property taxes — it only reflects paying the principal and interest:

Benefits of a 40-year mortgage

There are two primary reasons why it might make sense to stretch your home loan to 40 years: smaller monthly payments and the potential for short-term savings.

Lower monthly payments

If your budget is especially tight, a 40-year mortgage can make a meaningful difference. For example, based on just the interest and loan principal, a $250,000 loan at 3.29 percent interest across 40 years would create an additional $156 in your monthly budget.

Potential for bigger short-term savings

If you’re considering an interest-only payment option in the first 10 years of your 40-year loan, you can create more room in your budget during that first decade. Keep in mind, however, that paying only interest means you might not be building any equity in the property, so it’s an asset you can’t leverage initially.

Risks of a 40-year mortgage

While a 40-year mortgage might seem like a safe option now, over the long term it can present numerous disadvantages:

Higher price tag

Compared to 30 years, the extra interest over 40 years adds up. At that point in your life, imagine how much more you could have done to prepare for retirement.

Higher interest rate

While the chart above uses a 3.4 percent interest rate on both a 30-year and a 40-year mortgage, the reality is that a mortgage lender will likely charge you a higher interest rate for a longer term. What’s more, if you’re making a smaller down payment and need more time to pay it back, you might be considered a higher-risk borrower.

Large payment swings

Sure, those interest-only payments can look good for the first 10 years, but what about when the principal finally kicks in? You might not be prepared for the shock of a bigger bill at that point. If you get a 40-year ARM, you could be in for an even bigger surprise: If your rate increases by 2 percent at the end of a five-year period, say, you’ll be looking at a larger difference in your payment obligation. Plus, with a longer term, you could be looking at more rate increases simply because of the longer timeline.

Not widely available

With 30-year mortgages, you have a wide range of options to compare. There are fewer choices when shopping for a 40-year mortgage, so you’ll have less of a chance of finding a great deal.

40-year mortgage rates

The interest rates on 40-year mortgages will likely be higher than 30-year mortgages. While the rate you may qualify for will vary depending on a number of factors,you’ll most likely pay more for the privilege of having more time to pay it back – just as you pay a higher interest rate on a 30-year mortgage than on a 15-year mortgage. The adage “time is money” also applies when you borrow cash.

40-year mortgage refinance

If the lender you’re working with offers it, you might be able to refinance your current mortgage into a 40-year mortgage. While that move will lead to lower monthly payments now, you’ll be delaying the ability to pay off the mortgage for four decades. Plus, you’ll need to be able to pay closing costs, which can run you thousands of dollars.

Where can you find a 40-year mortgage?

Searching for 40-year mortgages is much more challenging than trying to find a 30-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, credit unions and non-traditional lending institutions might offer them, however, so carefully vet the lenders that do. Be sure you compare current rates, and be cautious if you get an offer with a rate that’s considerably higher than what’s out there on the market. Ask your lender about the down payment requirements and any fees, including prepayment penalties.

Is a 40-year mortgage a good idea?

If you’re really struggling to make ends meet monthly, the smaller payments on a 40-year mortgage might be helpful for you. However, it’s wiser to consider how to cut other costs and turn to a 40-year loan as a last resort.

Additionally, be extremely wary of 40-year ARMs. A low rate today might be tempting, but if it increases in five years, you could find yourself in a tough position. For most borrowers, a 40-year mortgage winds up costing too much in the long run to justify any (perceived) savings along the way.

Alternatives to 40-year mortgages

If you’re seeking lower monthly payments, you have options. Many mortgage lenders allow you to pay mortgage points or discount points upfront to reduce your interest rate, which trims your monthly payment moving forward.

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

Overall, 40-year mortgages can be more risky and more expensive than their more common counterparts, so carefully weigh the pros and cons as you compare options when buying a house.

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor
Reviewed by
Senior wealth manager, LourdMurray
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