Pros and Cons of a 40-Year Mortgage
They're Hard to Find and More Expensive, but You'll Pay Less per Month
40-year mortgages are home loans scheduled to be paid off over 40 years. Their longer time frame allows a lower monthly payment. The tradeoff is higher interest costs over the life of the loan.
Most mortgages are 15 or 30 years long; a 40-year mortgage is not that common.
However, because the loan is 10 years longer, the monthly payments on a 40-year mortgage are smaller than those on a 30-year loan—and the difference is greater still when compared to a 15-year loan. The smaller payments make these longer loans attractive to buyers who:
- Want the smallest monthly payments possible
- Have cash flow problems
- Are trying to stretch to get into a more expensive house
Since 40-year mortgages are not as common, they are more difficult to find. You can't get a Federal Housing Authority (FHA) loan that's 40 years long, and many bigger lenders don't offer any loans longer than 30 years. You'll need good credit to qualify for one if you find it, and your interest rate on these loans may be higher, too.
The main advantage of 40-year loans is the lower monthly payment. Plus, stretching the loan over 40 years instead of 30 years could mean the ability to afford more house, which can be a plus for homeowners trying to maximize their housing dollar, allowing for them to qualify for as much house as possible.
Some 40-year loans are the result of loan modifications, a process in which the lender and the borrower work together to restructure the loan and keep the borrower in his home after financial setbacks.
While lower monthly payments may be attractive, there are always tradeoffs. Using a 40-year mortgage means you’ll pay more in interest and you’ll build equity more slowly. By using a loan amortization calculator, you’ll see how the total interest costs are higher with a 40-year loan.
It’s not just the longer time frame that increases interest costs. 40-year mortgages also come with high interest rates. Expect to pay an extra .25% or more than you would on a 30-year mortgage.
If you’re looking at 40-year mortgages, you should ask yourself whether you're trying to buy more home than you can afford.
Comparing 30-Year to 40-Year Mortgages
Discussing the term length of a mortgage means discussing how long it will take to pay the loan off. With each monthly payment, you pay some interest, and you repay part of the loan balance. With a 40-year fixed-rate mortgage, your final payment in year 40 will completely pay off the loan. The process of paying down a loan is called amortization.
When you change one part of a loan (the interest rate or length of time to repay it, for example), you change how quickly it will amortize. By lengthening the time frame, the loan amortizes more slowly.
For example, say you want to borrow $200,000 to buy a house. At 4.5%, a 40-year loan would cost $899 per month. Change the 40-year term to a 30-year one, and it would cost $1,013 per month, or $114 more. But look closer: The 40-year loan would cost you $431,580 in principal and interest over the life of the loan, and the 30-year loan would cost you $364,813—$66,767 less.
Where to Find a 40-Year Mortgage
The Consumer Financial Protection Bureau (CFPB) requires qualified mortgages (QM) to include a term no longer than 30 years, making 40-year loans an unqualified mortgage. A qualified mortgage is one that meets certain standards laid out by the CFPB that are designed to make sure you can afford the loan.
Unqualified mortgages may still be appropriate for your borrowing situation, but big lenders don't view them as safe as other loans, so they're not offered as much. (Jumbo loans are another type of unqualified mortgage that is still offered under the appropriate borrowing conditions.) Products like the 40-year mortgage were briefly easier to find before the 2008 mortgage crisis; nowadays they're a tiny fraction of the overall loans issued in the U.S.
Since 40-year mortgages are rare, they take a little more legwork to find. You'll most likely find them with smaller, private lenders and credit unions, and you might be more likely to encounter them in places with extremely hot and expensive real estate markets (such as in California).
A 40-year mortgage might be perfect for you. If you do your homework and work closely with your lender, you may decide that it’s the best option. However, you should consider some alternatives and rule them out before moving forward.
Depending on your goals and your credit, interest-only loans might accomplish something similar to a 40-year mortgage. You might have more luck finding an interest-only loan or a 40-year mortgage depending on the marketplace. See what the banks are offering before making a decision.
You should also consider borrowing less and using a shorter-term loan. If you’re stretching to buy more than you should, it’s easier to get in trouble later. Be sure you're leaving some buffer in your budget to cover unexpected expenses down the road.