The most common mortgage loan 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 payoff period could reduce your mortgage payment and bring home affordability within reach, a 40-year mortgage comes with limitations that should give you pause.
Not many lenders offer 40-year mortgages, but you may find this type of mortgage as a loan modification if you’re struggling to keep up with payments. Learn more about 40-year mortgages, whether you can get one and whether it’s a good idea.
[Read: Best Mortgage Lenders.]
What Is a 40-Year Mortgage?
A 40-year mortgage is a home loan you make payments on for 40 years — 480 months — instead of the more common 30- or 15-year terms. Borrowers might choose a 40-year mortgage because stretching payments out longer offers a more affordable monthly payment.
Though 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 U.S. was part of the 2008 financial crisis.
Today, you may find a 40-year mortgage as a loan modification or, less often, for home purchases with some lenders. Experts speculate a 40-year mortgage may soon become more widely available as many first-time homebuyers face an affordability crunch.
How Does a 40-Year Mortgage Work?
A 40-year mortgage is typically a modification of a 30-year home loan, says John Schmoll, founder of personal finance website Frugal Rules. Lenders may offer a 40-year mortgage to homeowners who are struggling with payments. With a longer repayment period and lower monthly payments, a 40-year mortgage can help borrowers who aren’t keeping up with their existing loan.
Though rare, some lenders offer 40-year mortgages for new home purchases. You may 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, depending on a benchmark rate.
With terms longer than 30 years, 40-year mortgages don’t meet qualified mortgage standards. In addition to having a longer term, you could find other characteristics that qualified mortgages typically don’t have.
For example, a 40-year mortgage may have an interest-only period at the beginning of the loan where you’ll pay just interest for a period of years. It’s also possible for nonqualified mortgages to have a balloon payment, meaning you’ll have to make a lump-sum payment after low payments for most of the loan term. Both of these setups can be risky as borrowers may face unaffordable payments after an initial period of low payments.
[Read: Best Mortgage Refinance Lenders.]
What Are 40-Year Mortgage Rates?
Interest rates on a 40-year mortgage may be lower than your current 30-year rate if you’re doing a loan modification, but expect higher rates for new 40-year loans than you’d pay on a 30- or 15-year mortgage.
When you modify your loan, terms can change, including your interest rate. Even if you get a lower rate, though, 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 for the lender — and you’ll pay for that with a higher rate.
How Does a 30-Year Mortgage Compare With 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. “While a 40-year loan is cheaper per month, it will likely result in tens of thousands in extra payments due to higher rates,” says Schmoll.
What Are the Pros and Cons of 40-Year Mortgages?
If you’re thinking about a 40-year mortgage, consider pros and cons, including the following:
Pros:
— Lower monthly payments. If you can’t afford your current mortgage payment, extending your term to 40 years could provide some relief.
— Short-term savings with an interest-only option. You may be able to pay only interest for the first years of a new 40-year mortgage. But be sure you can afford payments when the interest-only period ends.
Cons:
— Higher total cost of borrowing. You’ll pay more interest with a longer repayment and likely a higher interest rate.
— Equity builds slower. Because your repayment term is longer, it will take more time for you to build equity in your home.
— Not widely available. It may be challenging to find a 40-year mortgage.
— Potentially risky terms. A 40-year mortgage is a nonqualified mortgage, and it’s possible that it will come with terms such as an interest-only period or a balloon payment.
Where Can You Find a 40-Year Mortgage?
You’re most likely to find a 40-year mortgage as a loan modification, but the lender has to be willing to offer it. Not all mortgages have 40-year terms as a loan modification option.
It’s more unusual to find a 40-year mortgage for a purchase. Potential sources for 40-year mortgages include mortgage brokers, online lenders and credit unions.
Can You Refinance to a 40-Year Mortgage?
While loan modification changes your loan, it’s not a refinance because it’s still the same loan. That said, you could refinance to a 30-year mortgage at 10 years into your loan, effectively creating a 40-year mortgage.
Is a 40-Year Mortgage a Good Idea?
Generally, a 40-year mortgage isn’t a good idea. But if you’re at risk of losing your home and can get any type of relief, you should take it, says Krichmar.
A 40-year mortgage is very rarely a first choice, as a 30-year loan is a better financial decision, Krichmar says.
As a nonqualified mortgage, 40-year mortgages may also have risky loan features such as an interest-only period, balloon payments and higher fees.
“If you’re choosing to get a 40-year mortgage to save a minimal amount per month, it’s not a good idea,” Krichmar says. “You’re affecting generational wealth and your own wealth by setting up a bad financial decision to save a little bit of money.”
[Read: How to Get a Mortgage With No Down Payment. ]
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 lower-priced home.
— Consider a Federal Housing Administration, U.S. Department of Agriculture or U.S. Department of Veterans Affairs loan.
— Refinance a 30-year mortgage after 10 years.
— Look for other ways to save on your monthly payment, such as by shopping for cheaper homeowners insurance or buying discount points.
— On an existing mortgage, ask about forbearance or other modification options.
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Is a 40-Year Mortgage a Good Idea? originally appeared on usnews.com
