How Does a 40-Year Mortgage Work?

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Updated on Wednesday, January 23, 2019

When shopping for a mortgage, it’s important to examine all of your options before deciding which one is right for you. Although many mortgage products are 15- and 30-year mortgages, there’s another option available: a 40-year mortgage. While not as common as shorter-term mortgages, these can be viable financing options for many borrowers.

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In simple terms, a 40-year mortgage operates like other mortgage products but has a longer loan duration. It will have either a fixed or adjustable rate, although due to the length of the loan, they generally come with fixed rates. That fixed rate means your monthly payment amount will remain the same for the entire term of the loan. An adjustable rate, though, affects the monthly payment, which could increase or decrease periodically throughout the term of the loan.

When you dig a little deeper, there are some notable advantages and disadvantages to a 40-year mortgage that every borrower should know before signing up for this financing.

Advantages of a 40-year mortgage

One of the major pros of obtaining a 40-year mortgage is having lower monthly payments. Because the time to pay off the loan is stretched out over a longer period of time, payments are much lower than those of a shorter loan, like a 15-year mortgage. This is helpful for borrowers who may find the lower payment more manageable for their budgets. In many parts of the country, this could make homeownership more affordable and attainable for some buyers.

The savings homeowners pocket each month on a 40-year mortgage could go a long way toward helping them make ends meet. In the long run, that may enable them to keep their overall debt load down. Also, as they continue working, their income is likely to increase, not only making their monthly house payment more manageable, but also helping them build up savings that could provide a solid financial foundation for the future.

Taking it one step further, these steps could lead to the opportunity to refinance the 40-year mortgage into a shorter-term loan, which provides such benefits as a lower interest rate and building equity in the home more quickly.

Disadvantages of a 40-year mortgage

As stated, a primary advantage of obtaining a 40-year mortgage is having lower monthly payments. However, those lower payments do come at a cost, which generally means a higher interest rate. It’s no secret that the shorter the loan term, the better the interest rate. As a result, the interest rate on a 40-year mortgage will be higher than its counterparts with terms of 15 or 30 years. And if that rate is adjustable rather than fixed, it could bring great fluctuations over 40 years that negate the benefit of a lower monthly payment.

When comparing mortgage terms, that lower monthly payment may not even be enough to make a 40-year mortgage a good deal. “If you look at the difference in the monthly payment, depending on the size of the loan, it could be less than $100,” said Tendayi Kapfidze, chief economist for LendingTree, the parent company of MagnifyMoney.

If the borrower takes on a 40-year mortgage and the difference in monthly payments is so small compared with a shorter-term mortgage, it could indicate a major red flag. “It probably suggests that maybe someone is overextending themselves and taking too much risk in terms of how much they’re borrowing,” Kapfidze said.

That’s why it’s so crucial to make sure that whatever mortgage product is chosen makes good financial sense for the borrower. Rather than focusing on the short-term picture — a lower monthly payment — take a long-term approach and honestly evaluate if committing to a 40-year mortgage is the right choice.

Furthermore, because a 40-year mortgage comes with a higher interest rate, the overall total cost of the loan will be much higher than that of a shorter-term rate. Paying an extra 10 years worth of interest could add up big. For example, if you have a $100,000 mortgage with a 4% interest rate, the total you will pay over 30 years is $171,868. Change that to 40 years, and the total amount paid increases to $200,610.

Another drawback to a 40-year mortgage is it’s slow build in home equity. “Early on more of your payments are interest and not principal payments, and the principal payments are what helps build equity,” Kapfidze said.

This could have adverse consequences in the event you should want to take out a home equity loan or home equity line of credit (HELOC) at some point in the duration of the mortgage.

Furthermore, if, at some point, you need or want to sell the home, the return on your investment may be less than hoped for, given the slow build of home equity. Along these same lines, many 40-year mortgages include prepayment penalties, meaning you’ll have to pay a fee if you decide to sell the home, or even refinance it, before the mortgage is paid off.

Another con to obtaining a 40-year mortgage is that it’s not considered a “qualified” mortgage, meaning you cannot receive a Federal Housing Administration (FHA)-insured or U.S. Department of Veterans Affairs (VA) home mortgage, or receive one through Fannie Mae or Freddie Mac. As a result, not every financial institution offers this financing option, so it could be more difficult to find a lender to help you secure a 40-year mortgage.

How to get a 40-year mortgage

When searching for a 40-year mortgage, it’s important to have all your financials in order. Because these mortgages are not qualified, lenders are likely to have more stringent guidelines for approving borrowers, and you need to be ready.

First and foremost, check your credit history to ensure there are no errors on your credit report that could negatively affect your creditworthiness. It’s also important to take steps favorable to applying for a mortgage to strengthen your credit score, including making on-time payments for any outstanding debts such as credit card, student loan or car payments.

In addition, you want to reduce your debt-to-income (DTI) ratio as much as possible. This means paying off any debts you can, such as credit cards, prior to applying for a mortgage.

Be prepared to provide copies of your pay stubs (last 30 days) and tax returns (last two years) to the lender for income verification purposes. The lender will likely also want to see bank statements (last two months).

And while the recommended amount for a down payment has generally been 20% of the home’s value, it’s possible the lender may require more for a 40-year mortgage. As a result, you may have to wait a bit longer to qualify so you have time to save up the extra cash needed to close the loan.

The bottom line

Depending on your financial circumstances, opting for a 40-year mortgage could provide some real benefits for your situation. However, before diving in just because of that lower monthly payment, carefully weigh the pros and cons and shop around for other mortgage products before making a decision. Putting in the time and effort to research all your options is the best way to ensure you apply for the mortgage that best suits your financial needs.

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