Navigating a 40-Year Mortgage: Pros and Cons
With increasing home prices, many people find home ownership out of reach. Not only does it require a large down payment, but monthly mortgage payments can be out of many people’s budget.
Enter the 40-year mortgage. While the most common mortgage terms are 15, 20, and 30 years, some lenders offer 40-year mortgage loans. The longer term means lower monthly payments for borrowers.
Keep reading as we explore 40-year mortgage loans, some of the pros and cons you should consider, and where you can find 40-year mortgage lenders.
Key Takeaways
40-year mortgages are a great way to lower your monthly mortgage payment.
In exchange for a lower monthly payment, you pay more in interest over the life of your loan.
40-year mortgages significantly slow down your ability to build equity.
What is a 40-Year Mortgage?
When you purchase a home using a 40-year mortgage, your amortization schedule takes place over 40 years instead of the more traditional 15, 20, or 30 years. Because your payments are spread out over a longer period, the amount due each month is less, making home ownership easier for those on a tighter budget.
On the downside, because your payments are spread out over a longer period, you end up paying more for interest over the life of the loan. Plus, because not as many lenders offer a 40-year mortgage, you won’t have the same opportunities to shop around for the best rate as you would with other products.
Comparison to Other Loan Terms: 30-Year vs 40-Year Mortgage
If you’re trying to decide if a 30-year vs. 40-year mortgage makes more sense, it’s important to understand how they stack up against each other. Here are a few of the differences.
Terms: The biggest difference is in the loan term itself. With a 30-year mortgage, you make payments over 30 years. However, with a 40-year mortgage, your payments are spread out over 40 years.
Monthly Payment Amount: Because your payments are spread out over a longer period, you pay less each month with a 40-year loan than a 30-year loan.
Interest: Because you're paying off a 40-year loan for 10 additional years, you pay more overall interest.
However, to really understand the difference, we should compare a 30-year and 40-year mortgage side by side.
Suppose you’re purchasing a new home with a $400,000 loan at an interest rate of 5.98%. Below is a comparison of your payments and the total cost of a 30-year and 40-year loan.
30-Year Mortgage | 40-Year Mortgage | |
Monthly Payment | $2,400* | $2,200* |
Total Interest Paid | $461,500 | $653,700 |
*All figures are for example purposes only. Rate and payment may not be available.
As shown above, you reduce your monthly principal and interest payment by $200 with the 40-year mortgage. However, the total interest you pay over the life of the loan increases by nearly $200,000.
How Does a 40-Year Mortgage Work
40-year mortgages work just like a 30-year mortgage. You can choose a fixed rate or variable rate. With a 40-year fixed-rate mortgage, your monthly payment stays the same for the life of your loan. However, with a variable-rate mortgage, your payment is fixed for a certain number of years at the beginning of the loan but then switches to a variable rate.
Some people like to use adjustable-rate mortgages because they offer a slightly lower interest rate at the beginning of the loan. Unfortunately, depending on which direction mortgage rates are moving, they can get more expensive once the rate becomes variable. Luckily, just like a 30-year mortgage, you can refinance a 40-year mortgage anytime.
Advantages of Choosing a 40-Year Mortgage
There are several benefits of using a 40-year mortgage. While we’ve already mentioned many of these, let’s dig deeper.
Lower Monthly Payment
The biggest advantage of a 40-year mortgage is that it helps lower your monthly mortgage payment. Because housing prices are so high in many areas, this can help someone purchase a home who might not be able to otherwise.
Creative Loan Structures
Typical mortgage payments include both principal and interest payments. However, depending on your lender, you might have the option to start with interest-only payments. This can help reduce your monthly payment even further, freeing your budget up for other things. However, if you have leftover room in your budget, you’ll still have the opportunity to make a principal payment on your account.
Disadvantages of Choosing a 40-Year Mortgage
Even though there are a couple of benefits to using a 40-year mortgage, there are also some drawbacks.
More Interest
Being able to lower the monthly payment can be a major help to some people, but there’s a tradeoff. The longer 40-year term means you pay more money in interest over the life of the loan. In the example provided above, you see that a person with a 40-year loan would have paid nearly $200,000 more in interest over the life of the loan.
Builds Equity Slowly
Owning a home is most people's largest asset. In addition to appreciation, monthly principal payments increase the equity you have in your home. However, longer-term mortgages have smaller monthly principal payments, meaning equity builds more slowly.
Not Offered By Many Lenders
There are very few lenders that offer 40-year mortgages.
Which Lenders Offer 40-Year Mortgages?
Forty-year mortgages are considered a non-qualified loan. That means they won’t be available from many of your traditional mortgage lenders. Instead, they are only available through portfolio lenders, meaning you’ll make the payment to them through the life of the loan.
If you’re looking for a 40-year mortgage lender, you can try any of the following:
Private Lenders
Credit Unions
Mortgage Brokers
Online Lenders
Community Banks
Other Loan Options
If you’re considering a 40-year mortgage to lower your monthly payment, there are a few alternatives to also consider.
Choose a Less Expensive Home
Instead of choosing a 40-year mortgage, you could go with a 30-year and look for a little less expensive home. Then, once you’ve built up some equity, you can upgrade and keep your monthly payments close to the same.
Purchase Discount Points
Another popular way to lower your monthly mortgage payment is to purchase discount points. This allows you to secure a lower interest rate, reducing how much you pay each month for the life of your loan.
40-Year Mortgage FAQs
Is there an FHA 40-Year Mortgage?
If you currently have an FHA mortgage, you can use loan modification to move into a 40-year loan if you qualify. You typically have to be late on your payments for this option, but being late on purpose isn’t a good idea just to qualify for a 40-year modification.
Can you refinance into a 40-year mortgage?
Some lenders allow you to modify your mortgage into a 40-year loan. However, if you don’t qualify for a loan modification, you may be able to refinance into a 40-year mortgage if you have enough equity in the home.
What about a 50-year mortgage?
Some lenders offer a 50-year mortgage, but they’re even more rare than a 40-year mortgage. 50-year mortgages extend the loan term an additional 10 years, further lowering the monthly payment for borrowers. The biggest downside is that they end up costing even more in interest over the life of the loan.
The Bottom Line
If you’re looking for ways to lower your monthly mortgage payment, you might consider a 40-year mortgage. While there are certain advantages, there are also some downsides. By understanding how a 40-year mortgage works, you can make a decision that’s best for your finances.
