A 40-year mortgage can help you lower your monthly payment to make the home you want to buy more affordable. The tradeoff is that by extending the time you have to repay the loan, you will be paying back more in interest as well as building equity in the home at a slower rate. If the lower payment a 40-year mortgage offers is still the best option you have to buy a house, you may be able to refinance to a shorter term and lower interest rate later on.
Talk to several lenders about the benefits of a longer-term mortgage loan. If the option allows you to buy a home you might not otherwise be able to afford right now, you may be able refinance to better terms as your income increases over the years. Should you refinance the loan or sell your home within the next five to seven years, taking out the loan over a longer term won’t cost you that much more. Yet during that time you can take advantage of a lower monthly payment.
Find out from a lender what kind of 40-year mortgage loans it offers. While not all lenders offer 40-year loans, these longer-term loans have been growing in popularity. Some lenders offer 40-year fixed-rate mortgage loans with terms similar to those of a 30-year fixed rate mortgage. However, it’s more common for a lender to offer a 40-year adjustable rate mortgage (ARM). For example, a lender might structure the loan so that you will pay a fixed rate for the first five years and then make annual rate adjustments for the remaining 35 years of the loan.
Ask the lender to show you the numbers. Note how much the monthly payments would be for both a 30-year and 40-year mortgage. Request that the loan officer calculate how much more in interest you would be paying over the 40-year loan term so that you can make a more informed choice. Your lender or mortgage broker can help you determine if your current financial situation makes you a good candidate for a 40-year mortgage loan. Inquire about all the loan options available to you that would help to lower the monthly payments.
Get your credit in order before you begin the mortgage application process. Request copies of your credit report from each of the major credit-reporting bureaus — Experian, Equifax and TransUnion, which are available for free once a year (see Resources).
Provide all of the information requested when completing the mortgage application. Don’t leave any items blank. Along with your credit history, a lender will want information about your employment, income and expenses, bank accounts and major assets that can be used as collateral for the loan. A lender generally asks to see your last several pay stubs, bank statements, credit account information and your last year’s income tax return. You may be asked to show additional documentation as proof of income and assets.
- Consider both the pros and cons of a 40-year mortgage beforehand. Don’t let the idea of lower payments tempt you into buying a more expensive house that you really can’t afford.
- If you are expecting your income to increase significantly over the next few years, a 40-year mortgage may offer you the opportunity to borrow more money at payments you can manage until you get established in your career and your salary rises.
- The more you can afford to put down as your down payment, the more likely you are to be approved for a loan. A down payment of 20 percent is standard for most lenders, although some will approve a loan with a smaller down payment. Set additional funds aside to pay for closing costs. Get confirmation in writing of the total closing costs.
- According to MSN Money, lenders usually charge one quarter to one half of a percentage point higher interest rate for 40-year mortgages than for traditional 30-year fixed-rate mortgages.
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