The Pros and Cons of 40-Year Mortgage Loans


BY The Lenders Network

3 minute read

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.

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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

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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.

40 year mortgage vs. 30 year mortgage loan

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.

Amortization

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.

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