The Lesser-Known 40-Year Mortgage: What You Should Know
You’ve been on the hunt for your dream home, enlisted a real estate agent and even visited a banker or two to talk home loans. Chances are none of these pros told you about one of homebuying’s best-kept secrets: a 40-year mortgage.
This lesser-known mortgage tends to get overshadowed by its much more common counterparts: the 30- and 15-year mortgages.
So, what is a 40-year mortgage? The terms vary by lender, but a basic 40-year mortgage works much like a 30-year mortgage, with payments stretched out over an additional 10 years.
A 40-year mortgage can be hard to find and isn’t for everyone, but it may be right for homebuyers with good credit who are looking to buy a new home that’s a stretch for their budget.
If you are considering a 40-year mortgage, it’s crucial to do your homework, understand the pros and cons, look at alternatives and make sure this unusual mortgage really is the best choice for you.
Do 40-year mortgages exist?
We’ve already learned that 40-year mortgages are not a myth. But homebuyers trying to find a 40-year loan may have a hard time tracking one down because not all lending institutions offer them.
So, how do 40-year mortgages work? The structure of a 40-year mortgage will depend on the lender and the specific loan program, so it’s important to read the terms carefully and ask questions to fully understand the details of any loan you’re considering.
Here are some different ways a 40-year mortgage may work:
Traditional, fixed-rate mortgage with a 40-year term: These 40-year mortgages work exactly like 30-year, fixed-rate mortgages but with payments stretched out over an additional decade. A fixed-rate, 40-year mortgage will have a fixed interest rate over the entire life of the loan, meaning it will never change. “All it does is take that payment and stretch it out over a longer time period,” said Tendayi Kapfidze, chief economist for LendingTree.
A 40-year mortgage with an adjustable rate: While fixed interest rates are much more common, some 40-year mortgages may come with an adjustable interest rate (ARM). Homebuyers should be careful when considering this type of mortgage because interest rates could rise significantly.
A mortgage that requires you to pay only interest at the beginning: Other 40-year mortgages are structured so you pay only interest for the first 10 years. After that period, the loan converts to what is essentially a 30-year, fixed-rate mortgage. Homebuyers should use caution when considering this type of loan, as they will build zero equity during the initial period.
A mortgage with a balloon payment due at the end: Finally, some 40-year mortgages are amortized over 40 years but are actually due in 30 years. This means you benefit from lower payments as if you had a 40-year mortgage, but you actually have to pay the remaining balance in a lump sum after 30 years. This type of mortgage can be quite risky for homebuyers because they may not be able to come up with the large final payment. This structure is fairly uncommon, Kapfidze said.
So, who offers 40-year mortgages? Most large, traditional banks offer only 15- or 30-year mortgages. In fact, 40-year mortgages have become much less common since 2008 due to tighter lending standards put in place in response to the Great Recession. However, some credit unions and small banks do offer 40-year mortgages.
One word of caution: Because these mortgages are less mainstream, it’s especially important to vet your lender and make sure you’re working with a reputable institution.
Advantages of a 40-year mortgage
Most experts generally do not recommend 40-year mortgages, but they may be viable options in certain situations. Here are some benefits of a 40-year mortgage:
Lower monthly payments: The main advantage of a 40-year mortgage is lower monthly payments. This may be especially helpful for a first-time homebuyer seeking to buy property more expensive than a typical starter home, especially in parts of the country with extremely high housing costs, such as California. This can help a homebuyer who is barely on the edge of being able to afford a home in a high-cost area. If 30-year mortgage monthly payments are just a bit too high, a 40-year mortgage could mean the difference between getting into a home or being priced out of the area where you want to live. “There can be a pretty significant difference in the monthly payment compared with a 15- or 30-year mortgage,” Kapfidze said.
Interest rate locked in longer: If you get a fixed-rate, 40-year mortgage, you also get your interest rate guaranteed for a longer time period than is typical for a mortgage. This could be beneficial if interest rates rise over the years. While this is a benefit, “I don’t know that a lot of people out there are worrying about what the interest rate is going to be in 40 years versus 30 years,” Kapfidze said. “That’s a far-off scenario.”
Downsides of a 40-year mortgage
Forty-year mortgages also have several potential disadvantages you should know about before you apply. The minuses of getting a 40-year mortgage include:
You may have to do more legwork: Because not all lenders offer 40-year mortgages, you may have fewer options when it comes to selecting a lender. Because of this reduced choice of lenders, you may find you need to vet lesser-known lenders more carefully to make sure they’re reputable and the product they offer meets your needs.
You may pay a higher interest rate: In order to make up for the higher risk of offering a mortgage with a longer-than-typical term, a lender might charge a slightly higher interest rate for a 40-year mortgage. The rate could be anywhere from 0.1% to 0.5% higher than you’d pay on a 30-year loan. Depending on the lender, the difference could even vary more. This means that, with a 40-year mortgage, you may pay a higher amount over the life of the loan. How much higher will likely depend on the lender, how they view the risk and whether you have a relationship with that institution, Kapfidze said.
You build equity more slowly: With a 40-year mortgage, you build equity at a slower rate than with a 30-year mortgage, and at a much slower rate than a 15-year mortgage. This holds true especially if you get a 40-year mortgage that is structured so you pay interest only for a period of time at the beginning of the loan. For example, if you have a mortgage with a 10-year, interest-only period, you build zero equity for the first decade, then you build equity slowly over the following decade.
You may be taking on more risk: Depending on the type of 40-year mortgage you get, you may be signing onto a risky proposition. For example, if you get an interest-only, 40-year mortgage, where you pay only interest at first, you risk having built no equity in your home if you move sooner than anticipated. If you sign on for a balloon mortgage, you risk losing your home if you can’t come up with the cash for the lump sum payment at the end.
If you’re considering a 40-year mortgage, it’s important to crunch numbers carefully and compare options to make sure the benefits outweigh the downsides.
How 30- and 40-year mortgages compare
With a 40-year mortgage, you pay less each month but significantly more over the life of the loan than you do with a 30-year mortgage. How does it all add up in hard numbers? Let’s take a look at an example of a $300,000 home with a 10% down payment. We used a March 2019 interest rate of 4.125% for the 30-year mortgage and tacked on 0.3% for the 40-year mortgage:
Loan amount: $270,000
Interest rate: 4.125%
Monthly payment: $1,308.55
Total amount paid: $471,079.54
Loan amount: $270,000
Interest rate: 4.425%
Monthly payment: $1,200.83
Total amount paid: $576,402.87
As you can see, your monthly payment is only $108 lower with the 40-year mortgage, and you pay $104,919 more over the life of the loan.
How to get a 40-year mortgage
If you still like the idea of stretching out your mortgage payments for an extra 10 years, you may be wondering how to apply for a 40-year mortgage. First, you’ll need a higher credit score because you will not be able to get a loan through the Federal Housing Administration (FHA), which offers mortgages with terms up to 30 years and is also friendly to borrowers with lower credit scores.
To get a 40-year mortgage, you’ll need a credit score high enough to qualify for a conventional mortgage. That means your FICO score must be at least 620 to 640, depending on the lender. As with other conventional mortgages, lenders require you to have a steady income and a low enough debt-to-income ratio (DTI). Lenders may accept DTIs above 45% if you have good-to-excellent credit, meaning a FICO score of 700 or higher.
Next, you need to find a reputable lender that offers 40-year mortgages. This may be difficult, but your best bet is to contact a qualified housing counselor who may be able to point you toward a lender that offers this product. The Consumer Financial Protection Bureau offers an online tool that lets you search for a housing counselor by zip code. Another option is to ask your bank and check local credit unions to see if any offer 40-year mortgages.
Once you’ve located a lender that offers 40-year mortgages, you should get complete details about the product in writing before you apply. Find out how the mortgage works, whether there is a prepayment penalty, if you need mortgage insurance and how much you will pay over the life of the loan. If you’re happy with the terms of the mortgage, contact the lender to fill out an application.
The bottom line
In the world of homebuying, it’s rare to spot an offer for a 40-year mortgage. However, they may be the right choice for some homebuyers in expensive parts of the country.
Before you sign the papers for a 40-year mortgage, it’s important to weigh the pros, such as lower monthly payments, as well as cons, such as paying more over the life of the loan and staying in debt longer. Keep in mind, too, that you do not have to be stuck in a 40-year mortgage — you may choose to refinance to a shorter term. Many people refinance or sell their home before their full mortgage terms are up, anyhow, and it may be unlikely that you will actually be in your home for 40 years.
Most homebuyers probably will find it makes sense to go with the more common and widely available 30-year mortgage. And if a 30-year mortgage is too much of a squeeze on your budget, you may want to think about whether you can truly afford a home right now and consider other options. These include buying a smaller home, purchasing in a less expensive neighborhood or even postponing homeownership while saving up additional cash for a down payment. It’s always best to go into homeownership fully financially prepared, so waiting sometimes makes the most sense.