Is a 40-year mortgage a good idea? | Mortgages and advice
The most common mortgage terms are 15 and 30 years, but if you need a lower monthly payment, a 40-year mortgage may be an option. While this longer loan repayment period can reduce your mortgage payment and make home affordability within reach, a 40-year mortgage comes with limitations that should give you pause.
Few lenders offer 40-year mortgages, but you can find this type of mortgage as a loan modification if you’re struggling to keep up with the payments. Learn more about 40-year mortgages, if you can get one, and if it’s a good idea.
What is a 40 year mortgage?
A 40-year mortgage is a home loan on which you make payments for 40 years – 480 months – instead of the more common terms of 30 or 15 years. Borrowers may choose a 40-year mortgage because longer payments provide a more affordable monthly payment.
Although most people aren’t familiar with 40-year mortgages, they were more commonly available during the subprime mortgage crisis, says Dave Krichmar, a mortgage banker in Houston. The collapse of the subprime mortgage market in the United States was part of the 2008 financial crisis.
Today, you can find a 40-year mortgage as a loan modification or, less commonly, for buying a home from some lenders. Experts believe a 40-year mortgage could soon become more widely available as many first-time home buyers face an affordability crisis.
How does a 40 year mortgage work?
A 40-year mortgage is usually a modification of a 30-year home loan, says John Schmoll, founder of personal finance website Frugal Rules. Lenders can offer a 40-year mortgage to homeowners who are struggling to pay. With a longer repayment period and lower monthly payments, a 40-year mortgage can help borrowers who are defaulting on their current loan.
Although rare, some lenders offer 40-year mortgages for new home purchases. You can find fixed or adjustable rate options. With a fixed rate mortgage, your monthly principal and interest payment stays the same. The payment can go up or down with an adjustable rate mortgage, based on a reference rate.
With terms longer than 30 years, 40-year mortgages do not meet qualified mortgage standards. In addition to having a longer term, you might find other features that qualifying mortgages typically don’t have.
For example, a 40-year mortgage may have an interest-only period at the start of the loan where you will only pay interest for a certain number of years. It is also possible that non-qualifying mortgages have a lump sum payment, which means that you will have to make a lump sum payment after low payments for most of the term of the loan. Both of these setups can be risky as borrowers may face unaffordable payments after an initial period of low payments.
What are the 40-year mortgage rates?
Interest rates on a 40-year mortgage can be lower than your current 30-year rate if you change your loan, but expect higher rates on new 40-year mortgages than you would pay on a 30 or 15 year loan. mortgage.
When you modify your loan, the terms may change, including your interest rate. Even if you get a lower rate, you should still expect to pay more total interest over the life of your loan, thanks to the longer loan term.
Again, you should expect a higher rate on a new 40 year mortgage than on a 30 or 15 year mortgage. Generally, the longer you make payments, the greater the risk to the lender – and you’ll pay for it with a higher rate.
How does a 30 year mortgage compare to a 40 year mortgage?
You should have a lower monthly payment on a 40-year mortgage, but you’ll pay less overall with a 30-year mortgage. “Although a 40-year loan is cheaper per month, it will likely result in tens of thousands of additional payments due to higher rates,” Schmoll says.
What are the pros and cons of 40-year mortgages?
If you’re considering a 40-year mortgage, consider the pros and cons, including the following:
- Lower monthly payments. If you can’t afford your current mortgage, extending your term to 40 years could provide relief.
- Short-term savings with an interest-only option. You may only be able to pay interest for the first few years of a new 40-year mortgage. But make sure you can afford payments when the interest-only period ends.
- Higher total cost of borrowing. You will pay more interest with a longer repayment and probably a higher interest rate.
- Equity builds more slowly. Because your repayment term is longer, it will take you longer to build up equity in your home.
- Not widely available. It can be difficult to find a 40 year mortgage.
- Potentially Risky Terms. A 40-year mortgage is a non-qualifying mortgage, and it may come with terms such as an interest-only period or a lump sum payment.
Where can you find a 40 year mortgage?
You’re more likely to find a 40-year mortgage as a loan modification, but the lender must be willing to offer it. Not all mortgages have a 40-year term as a loan modification option.
It is rarer to find a 40-year mortgage for a purchase. Potential sources of 40-year mortgages include mortgage brokers, online lenders, and credit unions.
Can you refinance a 40 year mortgage?
Although the loan modification changes your loan, it is not a refinance because it is still the same loan. That said, you could refinance a 30-year mortgage to 10 years of your loan, creating a 40-year mortgage.
Is a 40-year mortgage a good idea?
Generally, a 40 year mortgage is not a good idea. But if you’re at risk of losing your home and can get any kind of relief, you should take it, Krichmar says.
A 40-year mortgage is very rarely a first choice because a 30-year loan is a better financial decision, Krichmar says.
As an unqualified mortgage, 40-year mortgages can also have risky loan features such as an interest-only period, lump sum payments, and higher fees.
“If you’re choosing to get a 40-year mortgage to save a minimal amount per month, that’s not a good idea,” Krichmar says. “You affect generational wealth and your own wealth by making a bad financial decision to save some money.”
Alternatives to a 40-year mortgage
A 40-year mortgage isn’t your only option. You can consider these alternatives, depending on your situation:
- Get a 30-year mortgage on a cheaper home.
- Consider a loan from the Federal Housing Administration, US Department of Agriculture, or US Department of Veterans Affairs.
- Refinance a 30 year mortgage after 10 years.
- Look for other ways to save on your monthly payment, such as buying cheaper home insurance or buying discount points.
- On an existing mortgage, ask about forbearance or other modification options.