Overshadowed by its better-known financial counterparts, the 40-year mortgage is still a viable financing option for many homebuyers. You may have to shop around a little to find a lender for this extended-term mortgage, because not all lenders offer them. But if a 40-year mortgage is a good fit for you, your shopping expedition will result in lower monthly house payments, which frees up more of your disposable income for other things.
TL;DR (Too Long; Didn't Read)
To get a 40-year mortgage, first find a reputable lender who makes these extended-term mortgages. Next, qualify for the mortgage according to the lender’s underwriting guidelines, which generally includes verifiable income plus a solid credit score of at least 620 and a debt-to-income ratio under 45 percent.
What Is a 40-Year Mortgage?
Like the more common 15- and 30-year mortgages, a 40-year mortgage is also a debt instrument that’s secured by the value of your property. But unlike these shorter-term mortgages that have payoffs of 15 or 30 years, you’ll make payments on a 40-year mortgage for 40 years. Because your payments are stretched out over a longer term, your monthly mortgage payments will be lower (compared to a shorter-term mortgage), but the sum of your total payments will be greater. A 40-year mortgage is sometimes the financing answer in markets where housing costs are inordinately high when compared to income levels.
Types of 40-Year Mortgages
You’ll have a choice of different types of 40-year mortgages, depending on what your lender offers, including:
- Fixed rate. This is the most commonly structured 40-year mortgage, with a traditional slant that mimics the traditional 30-year product. Payments are amortized over 40 years, at a fixed interest rate.
- Adjustable rate. Some 40-year mortgages are underwritten as adjustable-rate mortgages. The interest rate varies, depending on the terms of the loan, which means your monthly payment will also vary. This could result in a significant increase in your monthly payment if interest rates spike.
- Interest only. During an introductory period, typically 10 years, you’ll only make interest payments each month. After the introductory period, the mortgage essentially converts to a 30-year, fixed-rate mortgage. You’ll only begin to make principal payments after the mortgage converts, which means you’ll build no equity in your home during the introductory period.
- Balloon. Some 40-year mortgages are similarly structured as a 30-year mortgage but with monthly payments that are amortized over a 40-year term. At the end of 30 years, however, you’ll pay the remaining balance in a lump-sum (balloon) payment. Although 40-year balloon mortgages are uncommon, some lenders will underwrite them.
40-Year Mortgage Refinancing Option
Some borrowers choose a 40-year mortgage with the goal of eventually refinancing to a mortgage with a shorter term. This allows them to have lower payments in the infancy of the mortgage just to get a foothold in the door of homeownership. And then when their financial health improves, they can better shoulder the restructured payments of a refinanced loan. For example, if a borrower is paying off a student loan or transitioning to a higher-paying job, disposable income is lower than when these two financial obligations are met.
Who Offers 40-Year Mortgages?
Larger financial institutions typically offer 15- and 30-year mortgages instead of the longer 40-year product. Credit unions, smaller banks and mortgage companies are among the lenders who extend 40-year mortgages. Check with your banker or a local credit union to find out if they offer longer mortgages. Even if they don’t, they may be able to point you in the direction of a reputable lender.
40-Year Mortgage Lender Search Tool
The Consumer Financial Protection Bureau may be able to help with your search for a 40-year mortgage lender by putting you in touch with a housing counselor. Housing counselors are located throughout the
Qualifying for a 40-Year Mortgage
Just as you’d have to qualify for other types of mortgages, you’ll also have to qualify for a 40-year mortgage. Along with the requisite information, such as employment and income verification, bank statements and tax returns, you’ll also need a solid credit score. Because the Federal Housing Administration does not insure mortgages with terms greater than 30 years, your qualifying process will be more closely aligned with that of a conventional mortgage.
Lenders of 40-year mortgages will require you to have a FICO score of at least 620 and a debt-to-income ratio of less than 45 percent. If you have a credit score of at least 700, your lender may accept a DTI that’s greater than 45 percent.
Advantages of a 40-Year Mortgage
Although a 40-year mortgage is not for everyone, it may be a good fit for certain buyers, offering benefits such as:
- Lower monthly payments than a shorter-term mortgage. This may be the biggest attraction of a 40-year mortgage, especially for first-time buyers who have other financial obligations, including other debts that are not retired yet, such as student loans.
- Affordability of a more expensive home. Lower monthly payments can also help a buyer to purchase a more expensive home, particularly in an area where housing prices are high.
- Fixed interest rate is guaranteed for a longer time. Although you may not be concerned about interest rates 40 years from now, at least you won’t have any rate increase surprises over the longer life of your 40-year mortgage.
Disadvantages of a 40-Year Mortgage
Instead of being solely tempted by the promise of lower monthly mortgage payments, a 40-year mortgage also brings some drawbacks to the table such as:
- Fewer lender options. You may have to do a little more research and legwork to find a reputable lender.
- Higher interest rate. Expect some lenders to charge a higher interest rate to extend a 40-year loan. The difference you’ll pay for a 40-year mortgage compared to one with a 30-year term may be in the range of 0.1 percent to 0.5 percent higher, but the rate could be higher, depending on the lender. Although this may seem like a nominal amount, it will add up over a 40-year term.
- Equity builds slower. Compared to 15- and 30-year mortgages, you’ll see your equity build much slower with a 40-year mortgage, particularly if you have an interest-only mortgage in which you don’t make any payments toward principal for perhaps 10 years.
40-Year Mortgage Vs. 30-Year Mortgage
When you crunch the actual numbers for a 40-year mortgage, you may be surprised at the result. For example, by using a mortgage calculator and plugging in the example of financing a $270,000 mortgage (a $300,000 home with a 10 percent down payment of $30,000), and an interest rate of 4.125 percent (30-year mortgage), the monthly payments will be $1,308.55. The total amount you’ll pay over the life of the loan is $471,079.54.
Using the same amount of mortgage and the same down payment amount, with a higher 40-year interest rate of 4.425 percent, the monthly payments drop to $1,200.83, but you’ll pay a total of $576,402.87 over the life of the loan. Your monthly payment is only approximately $100 less with the 40-year mortgage, but you'll pay more than $100,000 extra in the long run.
- 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.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.