Even when mortgage rates are coming down, purchasing a home remains expensive for many would-be buyers. One way to make mortgage payments more affordable is to take out a loan with longer terms, which spreads the total borrowed amount over more repayment time.
So if you are trying to purchase or refinance a home on a budget, a 40-year fixed-rate mortgage may be worth considering. You will pay more in interest over that time, but your monthly payments are likely to be lower. (You may, however, be able to refinance later into more traditional terms to reduce the overall amount of interest you will owe.)
Still, whether it’s a good option for you will depend on your financial situation and goals. Here are the pros and cons of a 40-year mortgage, how to apply for one and some alternative loans to consider.
Key Takeaways:
- A 40-year mortgage loan can mean a lower monthly payment, but you’ll be paying it off over a longer period of time – it will require 480 monthly payments – and racking up more interest as well.
- This type of nontraditional mortgage is referred to as a nonqualified loan, as it does not conform to the lending standards set by Fannie Mae or Freddie Mac.
- Not all lenders offer this extended type of home loan, so it may be a challenge to find one who does.
- Like other mortgages, a 40-year home loan may have a fixed interest rate or an adjustable rate.
What Is A 40-Year Mortgage?
A 40-year mortgage is a home loan with a repayment term of 40 years. It generally offers lower monthly payments than shorter-term loans do, but usually at the trade-off of costing more in total interest.
It is considered a nonqualified loan, which means that it does not conform to the lending standards set by Fannie Mae or Freddie Mac, the government-backed companies that help to expedite and stabilize the U.S. mortgage market. As a result, lenders may ask for nontraditional mortgage obligations, such as interest-only payments, on this type of loan. In addition, you cannot get an FHA, VA or USDA home loan with this term, because 40-year mortgages are not insured by government agencies.
How Can You Get A 40-Year Mortgage?
It can be challenging to find a 40-year mortgage loan – not all lenders offer them – but it isn’t impossible. Credit unions, online lenders and specialized nontraditional mortgage lenders tend to be the best bets.
Once you settle on a lender, the remaining steps are quite similar to those you’d follow when going through the typical mortgage application process for a loan of any length. There is one potential caveat with a 40-year mortgage, however: You will likely need a higher credit score (660 – 740) to qualify for one, because these loans come with a higher risk for the lender. The documentation required will generally be the same as for other home loans, such as recent paycheck stubs, bank statements and two years of income-tax returns.
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Examples Of A 40-Year Mortgage And How They Work
To get a better sense of how 40-year mortgages work, consider the examples below. In each case, we’ll be borrowing $320,000 to buy a home that costs $400,000. (To keep things simple for these purposes, that number doesn’t take into account closing costs, fees, points or property taxes.)
1. Basic Fixed-Rate Loan
With a 6.5% fixed-rate loan, you’d be making a monthly payment of $1,873.46 (going toward both interest and principal) for 480 months. Your total interest paid would be $579,261.66. So while your monthly payments would be lower, your $400,000 home would actually end up costing you $899,261.66.
By comparison, a 30-year fixed-rate mortgage with the same loan amount and interest rate would require a higher monthly payment but far less interest over time. On a standard 30-year schedule, your monthly payment would be about $2,022.62, and you’d pay roughly $408,142.36 in interest over the 360 months, so your home would ultimately cost $728,142.36.
2. Interest-Only Loan
In this case, let’s assume you took out a 40-year home loan on the same terms (a $400,000 home purchased with a $320,000 loan at a 6.5% fixed interest rate), but in this case the lender only offered it as an interest-only mortgage for the first 10 years.
In this scenario, your monthly interest-only payments would be lower: just $1,760.42. By the end of the 10-year interest-only term, you would have paid $211,250.40 ($1,760.42 x 120 months) – but remember, that’s all interest, and you would still owe the full $320,000 principal plus interest going forward.
For the remaining 30 years on the loan, you would then switch to a regular amortization schedule, with monthly payments (covering both principal and interest) of $2,054.22. Your total interest paid over the full life of the loan would add up to $625,770.80 – a good deal more than with the basic loan – and your home would end up costing you a total of $950,770.80.
If you were to take out a 30-year interest-only loan with the same parameters (which would be very unusual, but for the sake of argument let’s say you found one), the first 10 years would be exactly the same: You would make interest-only payments of $1,760.42 for 120 months, paying $208,000 in interest.
Then for the remaining 20 years, your monthly payments would rise to $2,423.11. Your total interest over the whole loan term would be $467,798.16, and the total cost of your home when all was said and done would be $792,798.16.
3. ARM Loan
An adjustable-rate mortgage (ARM) is a home loan with two phases: an initial fixed-rate period followed by an adjustable-rate period. During the fixed period, your interest rate stays the same for a set number of years, with that duration based on the type of ARM you choose. (Some of the more common fixed periods are 5, 7, or 10 years.)
To return to our example, if you received a 6.5% initial fixed rate on a $320,000 ARM, your monthly payment would be $1,873.46 (the same as for the fixed loan) – until the adjustable period (based on the type of ARM you use) began. After that, the interest rate would adjust based on market conditions, multiple times on a set schedule for the remaining term of the loan.
Let’s say your ARM with the initial terms above was fixed for 5 years and then adjusted once a year after that (this would be known as a 5/1 ARM). After five years of $1,873.46 monthly payments, your interest rate – and thus your payments – would adjust once every year for the remaining 35 years (on a 40-year loan) or 25 years (on a 30-year one). Since there’s no way of knowing whether interest rates will rise or fall for each of those adjustments, or by how much, it’s impossible to calculate in advance your total interest paid or total home cost at the end of the loan, unlike with the fixed-rate loans above.
ARMs typically start with lower interest rates than fixed-rate mortgages, which can be appealing to buyers who want a lower monthly mortgage payment. One risk for borrowers, however, is that when the adjustable period begins, monthly payments can increase. Of course, they can also decrease, which will benefit the borrower – but even the possibility of monthly payments going up is enough to worry borrowers. To offset that risk somewhat, ARMs generally also come with set interest rate caps, also called interest rate ceilings.
An ARM can stipulate up to three interest rate caps – initial, subsequent and lifetime adjustment. The initial adjustment cap (commonly set at either 2% or 5%) limits how much your ARM can adjust just in the first year the loan is set to adjust, while the subsequent adjustment caps (most often 1% or 2%) control the variance of the interest rate adjustment for each year after that initial adjustment. The lifetime cap, as the name implies, limits the amount the interest rate can increase in total over the life of your loan, and is most commonly set at 5%. (Some ARMs also have a lifetime floor, which sets a similar limit on how much the interest rate can decrease in total over the life of the loan.)
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Building Equity Using A 40-Year Mortgage
With a longer-term mortgage, it will take longer to build equity in your home – that is, the difference between what you owe on your mortgage and what your home is worth. That’s because those lower monthly payments also mean you’re paying down a smaller amount of your loan’s principal balance each month.
Overall Mortgage Costs: 15-Year Vs. 30-Year Vs. 40-Year
Here is an estimate of how much you will pay overall for a $350,000 mortgage loan using 15-, 30- and 40-year terms. In these examples, we’ve increased the interest rate as the terms grow longer, since lenders will almost always charge higher interest on longer-term loans (because they carry greater risk).
| Repayment term | Overall mortgage cost |
|---|---|
| 15-year, fixed rate, 5.51% interest rate | $515,161 |
| 30-year, fixed rate, 6.32% interest rate | $617,543 |
| 40-year, fixed rate, 6.85% interest rate | $1,025,000 |
Pros And Cons Of A 40-Year Mortgage
As with all mortgage types, there are both potential benefits and drawbacks to a 40-year loan.
Pros
- You’ll often get the lowest monthly payment.
- Nontraditional terms that are often attached to nonqualified loans, like interest-only payments, may drop your initial monthly costs even lower.
Cons
- Unless you have a down payment large enough to create a significant amount of equity in your home from the start, you might not be able to tap into your equity when you need it, since it grows more slowly on a 40-year mortgage than on a shorter one.
- Those nontraditional conditions could put you at financial risk. For instance, if you have a balloon payment, you might default on the mortgage if you can’t pay the whole lump sum when the time comes.
- You will pay more interest than you would on shorter-term loans, such as a traditional 30-year term. This means you’ll end up paying more for your property in the long run – often a good deal more.
- Because you’re building equity more slowly, and that limited equity may reduce your potential profit, it may become harder to refinance or sell your home.
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What Alternatives Are There To A 40-Year Mortgage?
If you are considering a 40-year mortgage to save on monthly payments, it’s also worth considering other paths to homeownership.
FHA Loans
An FHA loan can be a good choice if you don’t have a lot of funds for a down payment or your FICO® credit score is not high. With a FICO® score of at least 580, you can qualify for an FHA loan as a first-time buyer with a minimum required down payment of 3.5% of your home’s purchase price. This can help a great deal if you’re struggling to save up enough for both a down payment and closing costs.
VA Loans
VA loans are attractive because they don’t require any down payment. However, they are available only to active and veteran military service members and eligible surviving spouses. A Certificate of Eligibility is required.
USDA Loans
Like a VA loan, a USDA loan requires no down payment. The challenge here? You must buy a home in a part of the country that the USDA considers rural and meet the agency’s income limits. For more information about these loans and to determine if the home you want to buy qualifies, visit the USDA’s loan eligibility page.
Find A More Affordable Home
If you are trying to buy a home during a seller’s market, scaling back to a more affordable property might be a better financial choice than taking out a longer-term mortgage to afford a more expensive one. You won’t pay as much in interest, and your monthly payments might still be low enough that you can afford to apply for a lower-cost loan, such as a 30-year or 15-year fixed-rate mortgage.
Save For A Larger Down Payment
A larger down payment will lower your monthly mortgage payments because it reduces the loan’s principal. In addition, your lender will typically give you a lower interest rate, which also reduces your monthly payment.
Hidden Hazards Of 40-Year Mortgages
Because 40-year mortgages are nonconforming loans, they can be riskier, both to the lender and to the borrower. Loans outside the conforming marketplace come in a variety of types, and some are trickier than others.
Some nonconforming loans are interest-only loans, which are mortgages where you pay only interest for a set number of years. That results in a lower mortgage payment, but if you can’t refinance the loan or sell your home before that set time is up, you could face a considerable increase that you can’t afford.
You’ll also need to be aware of mortgage relief scams if you take out one of these loans. Predators know that they can cause financial hardships for unprepared borrowers, and they’re all too eager to promise you relief – such as lowering your final payment or negotiating a cheap settlement – that they can’t deliver, though they’ll be happy to charge you high fees along the way.
FAQ
The Bottom Line: Carefully Weigh The Pros And Cons Of A 40-Year Mortgage
A 40-year mortgage can make your monthly payments more affordable, but at the expense of paying significantly more in interest over the life of the loan and building equity more slowly. Before committing to any longer-term loan, weigh the pros and cons carefully, and explore other mortgage options that may fit your financial goals better.
Ultimately, the key is to look at your finances to determine if the home you want to buy is truly affordable to you, no matter the size of your monthly mortgage payment. To get a better idea of how much home you can afford, use our home affordability calculator and create a homeownership budget.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
