If you're 30 years old and looking for your first mortgage, the option to secure a 40-year mortgage can seem like a good solution to start on the path of homeownership. When planning to buy a home, a longer mortgage term equals lower monthly payments. With a longer repayment period and lower monthly payments, a 40-year mortgage also comes with a significant downside: You'll pay significantly more in interest over time. Read on to understand whether this mortgage structure will work for you.
Can You Get a 40-Year Mortgage?
You can get a 40-year mortgage, but not all mortgage lenders offer them, limiting your options. In addition to mortgage brokers and online lenders, you can check with local banks, credit unions or private lenders about the possibility of applying for a 40-year mortgage.
What Is a 40-Year Mortgage?
A 40-year mortgage is like a standard mortgage, with longer terms. While standard mortgages come with a payback period of eight to 30 years, some lenders offer longer mortgages. With a 40-year mortgage, if you don't make additional payments, it will take 40 years to pay off the mortgage with interest payments.
How Does a 40-Year Mortgage Work?
A 40-year home loan works like a traditional mortgage. You can apply for preapproval with mortgage lenders like banks, credit unions or online lenders. Each month, you'll have to pay a percentage of the principal plus interest. Depending on whether you have a variable interest rate or fixed interest rate, the monthly repayment amount may be set, or may readjust at specified adjustment periods. Some 40-year mortgages also offer an interest-only period, while on others you'll pay principal plus interest from the beginning of the mortgage terms.
Pros of a 40-Year Home Loan
A 40-year loan has some significant advantages that can make it the right choice. Here's an overview of the pros.
Lower Monthly Payments
A 40-year mortgage allows for smaller monthly payments than a 30- or 15-year mortgage, making it more affordable for some buyers. This is deceptive as you'll spend more in interest compared to similar shorter mortgages, but it can help borrowers stretch to afford more.
Increased Affordability
The lower monthly payments can make it easier for buyers to qualify for a larger loan and purchase a more expensive home. Especially in times of high interest rates, getting a 40-year mortgage can help families afford more.
Improved Cash Flow
The reduced monthly payments can give homeowners greater flexibility in managing their cash flow, especially during financially challenging times. During times of greater cash flow, you can always make additional mortgage payments. But when finances are tight, you will have an easier time making the mortgage payment.
Flexibility for Investments
With lower monthly payments, borrowers may have more flexibility to invest in other opportunities that can potentially generate higher returns. The additional monthly savings could go into a tax-advantaged retirement account or other investment opportunity.
Cons of a 40-Year Home Loan
A 40-year home loan will cost more in the long run and you'll be paying it off for longer. That's a bigger con than most borrowers realize. Here's what you'll want to weigh before getting a 40-year mortgage.
Higher Interest Costs
While the lower monthly payments may be appealing, a 40-year mortgage typically comes with higher interest rates, resulting in a higher overall interest cost over the life of the loan. Even if you manage to secure excellent mortgage rates, you'll be paying interest on the loan for an additional 10 years, which can equal tens of thousands of dollars in additional interest payments.
Longer Repayment Period
A 40-year mortgage means an extended time frame to pay off the loan, potentially delaying homeowners from fully owning their property and building equity. If you're already in your late 30s or 40s, a 40-year mortgage could mean only owning a home outright in your 80s.
Limited Equity Growth
With an extended repayment period, the rate at which homeowners build equity may be slower than shorter mortgage terms. This has financial implications if you choose to sell the property, or need to take a home equity loan in the future.
Potential Difficulty in Refinancing
A longer mortgage term can make it harder to qualify for refinancing if interest rates decrease, limiting your options for future refinancing.
Who Is Eligible for a 40-Year Home Loan?
The qualifications for a 40-year mortgage vary by lender, which is why it's important to shop around and compare lenders. For example, the Federal Housing Administration (FHA) added an option for 40-year FHA loans, but it’s only available in specific circumstances. That means you could qualify for a 40-year home loan with a credit score as low as 580.
In general, lenders look for borrowers with a debt-to-income ratio of 30% or less. A higher credit score will increase your chances of loan approval or give you better interest rates and terms.
How to Apply for a 40-Year Mortgage
The process of applying for a 40-year mortgage is similar to applying for any other mortgage. You'll usually start by applying for preapproval by providing basic information like a government-issued ID, your Social Security number and income. For final mortgage approval, you'll also need to present proof of income, savings and information on debt, and the lender will check your credit score and credit history.
Where to Get a 40-Year Mortgage?
You can get a 40-year mortgage from mortgage brokers, local or online lenders, credit unions or banks. You can start by searching online or checking with Benzinga's top mortgage lenders, below.
Get a 40-Year Home Loan with Benzinga’s Top Mortgage Lenders
Getting a 40-year home loan with Benzinga's top mortgage lenders has never been easier. Find the best lenders for your situation here.
Should You Get a 40-Year Mortgage?
In most cases, the savings in monthly payments of a 40-year mortgage aren't enough to justify an additional 10 years of mortgage payments. For example, the interest payments on a $225,000 mortgage over 40 years will cost you an additional $64,667 in interest payments with a 4% interest rate, and you'll only save about $50 per month on mortgage payments. If you've got an 8% interest rate and a bigger mortgage, the additional payments can total more than $100,000. Instead of a 40-year mortgage, you could consider an FHA loan, VA loan or nonqualified mortgage.
Frequently Asked Questions
Can I pay off a 40-year mortgage early?
Depending on the mortgage terms, you could pay off a 40-year mortgage early. Double-check with your lender to confirm there are no early repayment fees.
What is the average interest rate for a 40-year mortgage?
Average interest rates for a 40-year mortgage vary by lender and current market interest rates. However, 40-year mortgages tend to have higher interest rates than mortgages with shorter terms. At present, you can expect interest rates of 8% or more on 40-year mortgages.
Are there any alternative mortgage options to consider instead of a 40-year mortgage?
Instead of a 40-year mortgage, you could consider a nonqualified mortgage with shorter terms, an FHA loan, a VA loan or paying additional fees upfront to lower your interest rate and get a lower monthly payment over the life of the loan.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.