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 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.
- Lower mortgage payment
- Can afford a larger home
- Good for borrowers who write off the interest paid on a mortgage
- 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
Comparing 30-Year vs. 40-Year Loans
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.
Loan 1: $250,000 – 5% rate – 30-yr loan – monthly payment $1342
Loan 2: $250,000 – 5% – 40-yr loan – monthly payment $1205
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 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.