The 40-Year Mortgage: What You Need to Know
A 40-year mortgage is like a traditional 15- or 30-year mortgage but offers an extended payment term. If a homeowner remains in the property for the life of the loan and makes payments as agreed, they’ll pay off the mortgage in 40 years.
A 40-year home loan can provide some buyers with an affordable way to purchase a home in today’s increasingly expensive housing market, though it’s important to first weigh the benefits and drawbacks of this loan term.
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Can you get a 40-year mortgage?
Yes, it’s possible to get a 40-year mortgage. While the most common and widely used mortgages are 15- and 30-year mortgages, lenders can and do offer a wide variety of payment terms. For example, a borrower looking to pay off their home quickly may consider a 10-year loan. On the other hand, a buyer seeking the lowest monthly payment may choose a 40-year mortgage.
Traditionally, 40-year loans have been used as a loss mitigation option offered to homeowners who are in mortgage default or forbearance and struggling to make their house payments. This type of loan isn’t a common option for borrowers simply looking for a longer loan term on a new purchase.
Not all lenders offer 40-year mortgages, even as loan modifications, though. The U.S. Department of Veterans Affairs (VA), for example, doesn’t allow mortgage terms over 30 years and 32 days, even for homeowners in financial distress.
40-year mortgages aren’t qualified loans
It can be even more difficult to find a 40-year purchase loan than it is to find a 40-year loan modification. One reason is that this type of loan isn’t a “qualified mortgage” that follows a set of rules created by the Consumer Financial Protection Bureau (CFPB). These guidelines ensure that mortgage lenders aren’t taking advantage of borrowers by issuing them home loans they can’t afford. The CFPB established these rules in response to the subprime mortgage crisis that led to the Great Recession of 2007-09.
One of the rules for qualified mortgages is that they may not have a loan term of longer than 30 years. This requirement makes a 40-year home loan a non-qualified mortgage. So, borrowers looking to purchase with a 40-year loan may have to do a little extra searching.
Qualification requirements for 40-year mortgages
The minimum requirements to qualify for a 40-year purchase mortgage can vary from lender to lender. Since 40-year mortgages don’t follow the rules of conventional loans nor the rules of qualified mortgages, lenders have wide leeway to decide what minimum credit scores, loan-to-value (LTV) ratios, and debt-to-income (DTI) ratios they will accept.
How a 40-year mortgage works
The monthly payments on a 40-year mortgage are typically lower than shorter-term loans. However, you’ll end up paying more in interest because you make payments over a longer period. Additionally, 40-year fixed mortgage rates may be higher than those on 15- and 30-year loans.
Similar to home loans with more common payment terms, the structure of a 40-year mortgage can vary by lender and loan program. Here are a few ways a 40-year loan could work:
A 40-year mortgage with a fixed rateThis option is pretty straightforward. With a fixed-rate mortgage, the monthly principal and interest payments remain the same for the entire loan term. A 40-year mortgage extends the mortgage term by 10 years when compared with a traditional 30-year mortgage.
A 40-year mortgage with a variable rate Borrowers can get an adjustable-rate mortgage (ARM) with a 40-year term. An ARM has a fixed rate for a set time (for example, five, seven or 10 years) and then adjusts periodically for the remaining loan term.
A 40-year mortgage with an interest-only periodWith an interest-only loan, mortgage payments go toward the interest for a specific amount of time before converting to principal and interest payments.
A 40-year mortgage with a balloon payment With a balloon mortgage, you benefit from lower payments during much of the loan term but have to make a large, lump-sum payment when the mortgage comes due.
It’s worth reiterating that the CFPB considers all of these loan types to be subprime or risky for borrowers. Keep in mind that 40-year fixed mortgage rates may also be higher than loans with shorter terms, just as interest rates on 30-year mortgages are more expensive than 15-year mortgages. But even if they don’t carry a higher interest rate, the 10-year difference in the two loan terms can cost borrowers a huge amount over the life of the loan (more on this below).
Pros and cons of a 40-year mortgage
While a 40-year mortgage makes the loan payment more affordable, it does come with some risks. Consider both the advantages and disadvantages before you proceed with a 40-year home loan.
Lower monthly payments. The payment on a 40-year mortgage is more affordable than a 30-year mortgage with the same loan amount, because you have 10 extra years to pay it off.
Increased buying power. The extended payment term and lower monthly payments of a 40-year mortgage may allow some buyers to purchase more expensive homes. Similarly, some borrowers may be able to buy homes quicker than they would otherwise.
More flexibility. Forty-year loans with an initial period in which you only pay interest can allow a little more flexibility at the beginning of your loan term. This can be a nice feature if you find yourself grappling with the high costs of moving into, furnishing or fixing up a new home.
Higher interest rates. Mortgages with longer terms can sometimes have higher interest rates than loans with shorter terms. So, 40-year mortgage rates may be higher than 30-year mortgage rates.
Equity builds slowly. With a 40-year mortgage, you’ll build equity at a slower pace because the loan term is drawn out. This can make for a longer-than-usual wait if you want to refinance, get a home equity loan or remove private mortgage insurance (PMI), which all require you to meet minimum equity thresholds.
Higher total cost. Because of the longer repayment period, a 40-year mortgage will have a higher total cost than shorter-term mortgages. Unlike the closing costs for qualified mortgages, there’s no cap on closing costs and fees.
Harder to find. Not all lenders offer a 40-year home loan because it’s not a mainstream mortgage product.
Can be risky. If the 40-year loan has additional components, such as an interest-only period, negative amortization or a balloon payment, you could be taking on significant risk.
How to get a 40-year mortgage
If you are struggling to make mortgage payments and looking into 40-year mortgages as a loan modification option, the first thing you should do is contact your lender. If you’re in mortgage default, you have several options to consider, and your lender is required by law to work with you to find a solution. You may also want to reach out to an HUD-approved housing counselor for help evaluating your situation and understanding the options, which may include refinancing, forbearance, a deed in lieu of foreclosure or a short sale.
The process to secure a 40-year mortgage at the time of purchase (not as a loan modification) is very similar to that of a 30-year or 15-year loan:
- Determine whether you qualify Because 40-year mortgages are non-qualifying mortgages, some loan options won’t be available. For example, 40-year terms aren’t an option for government-backed loans (which typically have more lenient borrower requirements). So, you’ll need to make sure you’ll be able to meet the credit score, DTI and LTV requirements of your lender.
- Search for a mortgage lender Because these products aren’t widely available, you may need to do some extra research to find a lender or go through a mortgage broker or online lender. Before settling on one, make sure you’re working with a reputable lender. Compare multiple 40-year mortgage lenders to increase the chances you’ll find a lender you’re comfortable working with.
- Apply for the loan Your lender will guide you through the exact details of their process, but, typically, you’ll need to provide the same financial information and documentation as you would with a traditional-term mortgage.
- Review loan details Your lender will provide a loan estimate with all the details of the 40-year mortgage. Make sure to review the terms of the loan carefully and understand how the loan is structured and the estimated total payments. Ask the lender about anything that’s unclear.
Where to find a 40-year mortgage
Finding 40-year mortgage lenders isn’t as easy as finding lenders for other mortgage products, but it’s not impossible. It’s worth a shot to consult the bank or lender with whom you already have a relationship. If they don’t offer a 40-year loan, there are multiple places to look:
- Mortgage brokers. Some mortgage brokers work with lenders that specialize in 40-year loans and other non-qualifying mortgages.
- Online and local lenders. You may have success finding an online lender — or a small local or regional bank — that offers 40-year mortgages.
- Credit unions. Some credit unions have more flexible lending terms and may offer 40-year mortgages.
- Housing counselors. Your state or local HUD office can point you to a housing counselor and other resources. Additionally, the CFPB has a database of housing counselors.
How does a 40-year mortgage compare to a 30-year mortgage?
Purchase Mortgage Example: 40-Year vs 30-Year Loan Term
The loan repayment term directly impacts your monthly payment, interest rate and total loan cost. A 40-year loan term will require smaller monthly payments than a 30-year loan, but the total paid over the course of the loan will be higher.
When deciding between a 40-year mortgage and a 30-year mortgage, it’s helpful to look at the loans side by side. Below, we look at two hypothetical loan options for a $440,300 home with a 13% down payment.
|Loan term||Loan amount||Interest rate||Monthly payment||Total cost|
While you’d save $167 per month on your mortgage payments by going with a 40-year loan, you would end up spending about $203,400 more for the privilege.
Loan Modification Example: 40-Year vs 30-Year Loan Term
A loan modification can make your monthly payments more affordable, but it’s important to know that it will increase your interest rate and, ultimately, your total loan costs. Here we look at both 30- and 40-year loan options for a home with $300,000 still owed to the lender. In our example, there is no difference in the interest rate because a loan modification doesn’t alter the interest rate of the existing loan. The monthly payment amounts reflect principal and interest only.
|Loan amount||Interest rate||Monthly payment||Total cost|
Building Home Equity: 40-Year vs 30-Year Loan Term
Finally, it’s worth taking a look at how much more slowly you’ll build equity with a 40-year loan. The chart below compares the equity-building timelines for 30- and 40-year mortgages.
As you can see, with a 30-year loan, you would build 20% equity in five years, but with a 40-year loan, you’d have to wait nearly nine years to build that much equity. And depending on other terms of the loan (e.g., an interest-only period), it could take even longer to build equity.
Alternatives to a 40-year mortgage
Before committing to a 40-year mortgage, be sure you’re familiar with your other options.
- Mortgage points. If your primary goal is to have smaller monthly payments, prepaying interest by purchasing points could have the same effect.
- A 30-year conventional loan. Depending on the loan amount and interest rate, the payment on a 30-year conventional loan (not backed by the government) may not be much higher than a 40-year mortgage. You can also bump up the affordability of a 30-year mortgage by buying a slightly less expensive house.
- Refinancing. If you’re having trouble keeping up with your mortgage payments, you don’t necessarily have to alter the loan term. You can refinance to get a lower interest rate instead, which can bring your monthly payments down even if you retain the same loan term.
- FHA loan. Loans backed by the FHA may be an affordable alternative to a 40-year home loan. FHA loans have low interest rates, low down payment requirements and lenient credit requirements.
- USDA loans. Mortgages guaranteed by the U.S. Department of Agriculture (USDA) may also provide affordable payments. USDA loans have low interest rates and no down payment requirements but are only available to low- and moderate-income borrowers in designated rural areas.
- VA loans. Eligible veterans, military personnel and qualified spouses may find a loan backed by the VA to be an affordable option. VA loans have no down payment or mortgage insurance requirements.
- ARMs. If you’re able to move during the initial fixed-rate period, an ARM may be a good option for you. However, beginning May 1, 2023 conventional ARMs will come with extra fees (compared to fixed-rate loans) if you’re borrowing over 90% of your home’s value.
Frequently asked questions
A 40-year mortgage can be a good idea, depending on your situation. Since the loan term spans 40 years, the payments can be more affordable than loans with shorter terms. However, because of the higher interest rate and extended repayment period, 40-year home loans typically have higher total loan costs.
Mortgage rates for 40-year loans can be higher than rates on shorter-term mortgages. The exact rate depends on multiple factors, including the loan structure, your credit score and your down payment. Some lenders’ 40-year mortgage rates may be just a fraction of a percentage point higher than the rate on 30-year loans, while other lenders may impose a significantly higher rate.
You might be able to refinance to a 40-year mortgage depending on what your lender offers. Some banks and mortgage lenders provide 40-year loan terms as an option during the loan modification process. A loan modification is for borrowers who have difficulty affording their current mortgages. During this process, the lender may extend your repayment period to 40 years or change additional mortgage terms in order to lower your monthly payments.
The average monthly payment on a 40-year mortgage, using current rates and home prices, is $1,924. To calculate how much your monthly payment would be, make sure you know what interest rate and down payment amount you’re targeting and use a mortgage calculator.