Finding the right repayment term for your mortgage is critical because it affects how long you have to pay off your home loan, how much you pay each month, and the total amount you’ll pay over the years. Many lenders offer 15- and 30-year mortgage options, but there is also the less common 40-year mortgage. Here’s what you need to know about this term length.
More information: Different types of mortgage loans
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A 40-year mortgage spreads your principal and interest payments over 40 years. A longer repayment period often means a lower monthly payment, but a higher interest rate than loans with a shorter term.
Mortgages with terms longer than 30 years are classified as non-qualified or non-QM loans, which may have riskier features that make them more difficult to pay off.
Dig deeper: Non-QM Loans – How a Non-Qualified Mortgage Can Help You Buy a Home
Like 30-year mortgages, 40-year home loans can have fixed or adjustable interest rates. A 40-year fixed-rate mortgage has the same interest rate for the entire term. The interest rate on an adjustable-rate mortgage (ARM) changes periodically based on an index and margin.
Unlike traditional or qualified loans, a 40-year repayment option may have the following features:
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Grace period: The monthly mortgage payment only goes towards interest for a certain period of time. You will have low payments during the initial period, but your main loan balance will not decrease.
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Balloon payments: A mortgage with a balloon payment structure has lower upfront payments and a larger payment at the end of the loan, which could be more than twice the amount of your average mortgage payment, according to the CFPB.
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Negative depreciation: When a loan negatively amortizes, the balance owed increases over time, even as you make monthly payments. You’re more likely to see negative amortization if the lender allows partial payments that don’t cover the accrued interest. The outstanding interest can be added to your loan balance, increasing your debt.
Not all 40-year mortgages have the features listed above, but you should look for these options and talk to your mortgage lender about the pros and cons of its specific 40-year mortgage loan program.
Read more: How does an interest-only mortgage work?
Unlike qualified mortgages, 40-year mortgage loans are considered risky, so they can be difficult to find through traditional banks and lenders. However, some online lenders and credit unions offer 40-year options. There are even a few popular mortgage lenders, such as Carrington Mortgage Services and Newrez, that offer this loan term.
Otherwise, you may need to apply for a loan modification.
Yahoo note: Looking for a 40-year mortgage term? Read Yahoo’s Carrington Mortgage Services review and Newrez mortgage review to see if either is a good fit for you.
Your existing lender may allow you to extend your mortgage to a 40-year term, lowering your payment and possibly your interest rate. Some mortgage lenders have loan modification programs, especially for borrowers who are having trouble making payments.
For example, Fannie Mae’s Flex Modification Program extends repayment up to 480 months, lowering the monthly payment and, in some cases, lowering the interest rate. VA loans, insured by the U.S. Department of Veterans Affairs, have a similar option: extend repayment to 40 years and reduce monthly principal and interest payments to help borrowers avoid foreclosure. The Federal Housing Administration also recently introduced a 40-year modification program for FHA loans.
Read more: What is a VA loan and what are the eligibility requirements?
Interest rates are generally higher for longer term mortgages, so you’ll likely see higher interest rates on 40-year mortgages than on 15- and 30-year loans.
Your mortgage interest rate may also be higher or lower, depending on whether it is variable or fixed. Forty-year variable-rate mortgages could have lower interest rates than forty-year fixed-rate loans, but only in the short term. After the initial fixed period, ARM rates may increase or decrease based on economic conditions.
Dig deeper: How to Get the Lowest Mortgage Rate Possible
Here you can see how a 40-year mortgage compares to the more widely available 30-year home loan.
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Interest rates: Lenders may offer higher rates for a 40-year term than for a 30-year term, with the exception of loan modifications, where the lender can extend the loan term and lower your rate.
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Monthly payment: A mortgage with a term of 40 years generally has a lower monthly payment than a mortgage with a term of 30 years, because the balance is spread over more years. For example, the monthly principal and interest payment on a 40-year, $350,000 home loan with a 6.5% fixed interest rate is $2,049. The monthly mortgage payment on a 30-year loan with the same terms is $2,212.
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Total interest: Although you have a lower monthly payment, 40-year mortgages are generally more expensive because your principal has another 10 years to accrue interest. Using the previous example, a $350,000 home loan with a fixed interest rate of 6.5%, paid over 40 years, means a total interest spend of $633,567. This is significantly more than the $446,406 in total interest paid on a 30-year loan with the same terms.
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Stock timeline: One way to build equity in your home is to pay off your principal, which takes longer with a 40-year mortgage loan than with a 30-year term.
Read more: Mortgages with a term of 15 years versus 30 years
A 40-year mortgage can make homeownership more affordable, but it comes with significant risks that you’ll want to consider before jumping in.
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Lower monthly amount: Compared to shorter terms, such as 15- and 30-year mortgages, you’ll likely pay less monthly with a 40-year loan.
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Flexible loan and repayment options: Forty-year mortgages can come with interest-only payments, giving you much lower monthly payments for the initial period. Some lenders also offer adjustable rates, which may have lower starting rates depending on the lender and current economic trends.
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More expensive in the longer term: You will likely have a higher rate on a 40-year home loan and pay more total interest because the interest accrues longer. Use a 40-year mortgage calculator to see your monthly payment and total interest costs based on the terms of your loan.
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Characteristics of risky loans: Many 40-year mortgage programs offer affordable payment options, but these features can be somewhat misleading. Low payment offers, such as a balloon payment or a grace period, are likely to result in extremely high payments when the balloon payment is due or the grace period expires.
Dig deeper: How a balloon mortgage works
A mortgage with a term of 40 years is often good in the short term, but more difficult in the long term. It can come with lower monthly payments, making it more affordable to own a home in the short term. But you pay much more interest than with loans with a shorter term. Additionally, 40-year home loans can be quite risky, with features such as balloon payments or negative amortization that can leave borrowers with hefty costs in the future. Make sure you can afford the monthly payment over the long term, especially if your payment amount is expected to change.
Mortgages with terms longer than 30 years are considered risky by the Consumer Financial Protection Bureau (CFPB), so they can be more difficult to find than other types of mortgage loans. If you’re struggling to find a lender or terms you like, consider visiting a mortgage broker. A broker is an intermediary who helps you find a loan and lender that suits you.
Many lenders only offer mortgage refinancing loans with terms of 30 years or less. But it doesn’t hurt to ask about your options. Start with your current lender and ask about refinancing and modification. Some mortgage lenders have loan modification programs, such as those offered by Fannie Mae and the Department of Veterans Affairs, that extend the term of your loan to 40 years, lower your monthly payment and possibly lower your interest rate.
This article was edited by Laura Grace Tarpley.
