Are you having trouble qualifying for the home you want because it’s slightly out of your price range?
A 40-year mortgage loan will spread your monthly payments over a period of 40 years instead of 30.
This lowers your monthly payment allowing you to buy a more expensive home.
But there are some disadvantages you need to know about.
In this article, we will be discussing the pros and cons of 40-year mortgage loans so you can see if it’s right for you.
What is a 40-Year Fixed-Rate Mortgage Loan?
A fixed-rate loan has an interest rate that is fixed and does not change for the life of the loan.
The most common type of mortgage is a 30-year fixed rate loan.
In the last few years, shorter-term loans are becoming more popular, the 15-year and 20-year mortgage are more common today and in the past.
A short term mortgage loan won’t work for buyers on a budget who are looking to stretch out their mortgage payments to afford are more expensive home.
40-Year Mortgage Pros
- Lower mortgage payment
- Can afford a larger home
- Good for borrowers who write off the interest paid on a mortgage
40-Year Mortgage Cons
- Higher interest rate (as much as 25%-50% higher rate than with a 30-yr loan)
- The total cost of the loan is higher
- Will pay more interest than other types of loans
- Home equity will be built much slower
- An adjustable-rate mortgage loan may be a better option to get a more expensive home
See how much home you can afford using our home affordability calculator
40-Year vs 30-Year Home Loans – How They Compare
In this example, we will look at a borrower who is getting a loan for $250,000. We factored in the same amount of closing costs and interest rate, even though a 40-year mortgage will have a slightly higher rate it’s easier to use the 5% rate for this example.
As you can see in the chart above, you will save around $95,000 with the 30-year loan. But, the monthly payment for the 40-year mortgage is $137 less than the 30. The longer term will save you in the short term with lower monthly mortgage payments, but in the long run, a mortgage with a shorter team will be a better deal.
Your monthly mortgage payment is applied to principal and interest. With a mortgage, the majority of your monthly payments go towards interest. As the years go by, more of your payment goes towards the principal balance this is known as mortgage amortization.
A 40-year home loan stretches those payments much further than 15 and 30-year loans do. This means borrowers will be paying more interest, and have less of their payment go towards the principal balance.
Refinancing into-or-out-of a 40-Year mortgage
40-year loans are for homebuyers who need to get the lowest payment and don’t mind paying more interest over a longer period of time.
But things change, if your financial situation changes and you can put more towards your mortgage each month, you’re able to refinance a loan with a shorter term and interest rate.
For homeowners who are having trouble making their mortgage payments refinancing into a 40-year mortgage could be the answer.
Talk to a mortgage lender to see if a 40-year loan is right for you.
The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.