Getting a mortgage is one of the biggest financial decisions you can make. Most home loans today come with 15 or 30 year terms, but some lenders also offer 40 year mortgages. Could stretching out your payments over 40 years make sense for your situation?
As a homebuyer and personal finance blogger, I’m fascinated by the pros and cons of long term mortgages. I decided to dig into the details of 40 year loans to find out if they could be a good option for certain homebuyers.
What is a 40 Year Mortgage?
A 40 year mortgage is just what it sounds like – a home loan with a 40 year term. Instead of the more common 15 or 30 year repayment periods, your payments are spread out over 40 years.
This means you’ll have lower monthly payments, but pay more interest over the life of the loan. You’ll also build equity in your home slower than with a shorter term.
40 year mortgages can make sense for some buyers but they aren’t right for everyone. Let’s look at the key pros and cons.
Pros of a 40 Year Home Loan
Lower Monthly Payments
The main appeal of a 40 year mortgage is the chance for lower monthly payments. By stretching your repayment period by 10 years, your monthly payment goes down substantially compared to a 30 year loan.
For example, let’s say you get a $300,000 mortgage at 4% interest. Here’s how the payments compare:
- 30 year term: $1,432 monthly payment
- 40 year term: $1,264 monthly payment
That’s a $168 difference each month. For buyers on a tight budget, this lower payment could make homeownership more affordable.
Option to Pay Off Faster
One nice thing about longer mortgages is flexibility. Even if you get a 40 year loan, you can choose to pay it off faster by making extra principal payments.
This gives you the option of lower payments, while still letting you pay down your mortgage early if you come into extra cash flow. You aren’t locked into paying over 40 years.
May Allow You to Buy More House
The lower monthly payments of a 40 year term also mean you may qualify to borrow more. This increased buying power could let you purchase a more expensive home than you could swing with a 30 year loan.
Of course, just because you can afford higher payments doesn’t mean you should overextend yourself. But a bit more wiggle room can be helpful in competitive housing markets.
Cons of 40 Year Mortgage Loans
Pay More Interest Over Time
The tradeoff with smaller monthly payments is paying more interest over the life of the loan. You’re spreading payments out over a longer time, so the total interest adds up.
For example, on a $300,000 loan at 4%:
- 30 year mortgage total interest: $215,609
- 40 year mortgage total interest: $295,569
That’s nearly $80,000 more in interest with the 40 year term! You have to decide if lower payments now are worth the increased total interest.
Slower Equity Building
Since more of your payment goes toward interest in the early years, equity building is slower with a 40 year term. This can limit your options if you need to sell or tap home equity before the loan is paid off.
On a 30 year mortgage, you’ll typically have around 50% equity after 10-12 years. On a 40 year term, you may only have 30% equity at the same points.
Higher Interest Rates
Most lenders charge a slight rate premium for 40 year loans over 30 year terms. So in addition to more total interest due to the longer period, your underlying rate may be 0.125-0.25% higher too.
Be sure to shop around though, as rate differences can vary by lender. Some credit unions and smaller banks may offer 40 year loans with less of a premium.
More Refinance Risk
Having a mortgage for 40 years also increases your odds of needing to refinance along the way. If rates drop in 5-10 years, you’ll probably want to refi to lower your rate. But each refinance comes with closing costs.
With a shorter term, you may be able to avoid refinancing and the fees that come with it.
Who Should Consider a 40 Year Mortgage?
While a 40 year home loan isn’t right for everyone, it can make sense for certain borrowers. Here are some examples of situations where it may be a good fit:
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Retirees or others on fixed incomes – The lower payments can help those with limited cash flow. And in retirement, the tax benefits of mortgage interest decrease.
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First-time homebuyers – Stretching out payments can help new buyers afford their first home, even with student loans or moderate incomes. Then they can build equity and refinance down the road.
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Buyers in high cost markets – In expensive cities, 40 year loans provide more buying power. This increased budget means you can better compete and avoid being priced out.
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Those planning to upgrade homes before paying off – If you may sell your home and move in 5-10 years, a 40 year term gets payments low enough to buy now. You likely won’t pay the loan off anyway before upgrading.
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Borrowers with fluctuating incomes – For example, self-employed with seasonal business cycles. The lower required payments provide flexibility.
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People valuing cash flow now over total interest – Some buyers simply want to minimize their current mortgage payment, even if it costs more long-term.
How Do You Get a 40 Year Mortgage?
The process of getting a 40 year mortgage is similar to other home loans. Here are some tips:
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Check if your preferred lenders offer 40 year option – Not all lenders have them, so you may need to shop around.
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Compare interest rates – Remember rates are often slightly higher than 30 year loans. But shop for the lowest premium possible.
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Consider ARM loans – Most 40 year mortgages are fixed rate. But occasionally lenders offer 40 year ARMs, which start with even lower rates.
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Submit loan application and go through approval process as normal – Get pre-approved to know your rate and payment options.
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Optimize down payment amount – Putting 20% or more down on a 40 year loan can help secure the best rates.
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Understand tax implications – You can deduct mortgage interest on loans up to $750,000. Keep this benefit in mind.
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Recognize it limits future options – Make sure you’re comfortable being tied to a mortgage for 40 years. It reduces flexibility compared to shorter terms.
The right lender and loan program is key to getting a 40 year mortgage with the best terms. I suggest talking to both online lenders and local banks or credit unions to explore your choices.
Key Factors That Impact 40 Year Mortgage Payments
Like any home loan, several variables affect the size of your mortgage payment on a 40 year term. Let’s review the key factors:
Loan amount – The more you borrow, the larger your required payment. Be conservative when deciding how much house you can afford.
Down payment – Putting more money down upfront lowers the balance you need to finance. This reduces payments.
Interest rate – Clearly the higher the rate, the more interest and larger monthly payments. So shop aggressively for the lowest rate.
Property taxes and insurance – Your payment includes escrows for taxes and insurance. Higher property costs means higher payments.
HOA fees – For condos or HOAs, these fees will get added to your monthly mortgage payment.
Upfront mortgage insurance – If you put less than 20% down, mortgage insurance is usually required. This can increase your payment or upfront costs.
When getting estimates, be sure to account for all these factors to arrive at an accurate payment amount. Plugging numbers into an online 40 year mortgage calculator can help as well.
40 Year Mortgage Rates: What to Expect
Mortgage rates fluctuate daily based on bond market activity and other factors. But in general, here’s what you can expect with rates on a 40 year home loan:
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Fixed Rates – Most 40 year mortgages have a fixed rate for the full term. The rate premium over 30 year fixed loans is usually 0.125 to 0.25%.
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ARM Rates – Adjustable rate mortgages are less common, but some lenders offer 40 year ARMs. These start very low, but eventually adjust upward.
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Range of Rates – For today’s market, expect 40 year fixed rates between 4.25% and 5.25% for well-qualified borrowers, depending on down payment.
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Underwriting Impact – Your credit, income, assets and other factors influence the rate offers you receive. Maintaining a strong financial profile keeps rates as low as possible.
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Points to Buy Down Rate – Paying points upfront reduces your interest rate over the life of
Costs Associated with Home Ownership and Mortgages
Monthly mortgage payments usually comprise the bulk of the financial costs associated with owning a house, but there are other substantial costs to keep in mind. These costs are separated into two categories, recurring and non-recurring.
Recurring Costs
Most recurring costs persist throughout and beyond the life of a mortgage. They are a significant financial factor. Property taxes, home insurance, HOA fees, and other costs increase with time as a byproduct of inflation. In the calculator, the recurring costs are under the “Include Options Below” checkbox. There are also optional inputs within the calculator for annual percentage increases under “More Options.” Using these can result in more accurate calculations.
- Property taxes—a tax that property owners pay to governing authorities. In the U.S., property tax is usually managed by municipal or county governments. All 50 states impose taxes on property at the local level. The annual real estate tax in the U.S. varies by location; on average, Americans pay about 1.1% of their propertys value as property tax each year.
- Home insurance—an insurance policy that protects the owner from accidents that may happen to their real estate properties. Home insurance can also contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off the property. The cost of home insurance varies according to factors such as location, condition of the property, and the coverage amount.
- Private mortgage insurance (PMI)—protects the mortgage lender if the borrower is unable to repay the loan. In the U.S. specifically, if the down payment is less than 20% of the propertys value, the lender will normally require the borrower to purchase PMI until the loan-to-value ratio (LTV) reaches 80% or 78%. PMI price varies according to factors such as down payment, size of the loan, and credit of the borrower. The annual cost typically ranges from 0.3% to 1.9% of the loan amount.
- HOA fee—a fee imposed on the property owner by a homeowners association (HOA), which is an organization that maintains and improves the property and environment of the neighborhoods within its purview. Condominiums, townhomes, and some single-family homes commonly require the payment of HOA fees. Annual HOA fees usually amount to less than one percent of the property value.
- Other costs—includes utilities, home maintenance costs, and anything pertaining to the general upkeep of the property. It is common to spend 1% or more of the property value on annual maintenance alone.
Non-Recurring Costs
These costs arent addressed by the calculator, but they are still important to keep in mind.
- Closing costs—the fees paid at the closing of a real estate transaction. These are not recurring fees, but they can be expensive. In the U.S., the closing cost on a mortgage can include an attorney fee, the title service cost, recording fee, survey fee, property transfer tax, brokerage commission, mortgage application fee, points, appraisal fee, inspection fee, home warranty, pre-paid home insurance, pro-rata property taxes, pro-rata homeowner association dues, pro-rata interest, and more. These costs typically fall on the buyer, but it is possible to negotiate a “credit” with the seller or the lender. It is not unusual for a buyer to pay about $10,000 in total closing costs on a $400,000 transaction.
- Initial renovations—some buyers choose to renovate before moving in. Examples of renovations include changing the flooring, repainting the walls, updating the kitchen, or even overhauling the entire interior or exterior. While these expenses can add up quickly, renovation costs are optional, and owners may choose not to address renovation issues immediately.
- Miscellaneous—new furniture, new appliances, and moving costs are typical non-recurring costs of a home purchase. This also includes repair costs.
Early Repayment and Extra Payments
In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, borrowers need to understand the advantages and disadvantages of paying ahead on the mortgage.
Early Repayment Strategies
Aside from paying off the mortgage loan entirely, typically, there are three main strategies that can be used to repay a mortgage loan earlier. Borrowers mainly adopt these strategies to save on interest. These methods can be used in combination or individually.
- Make extra payments—This is simply an extra payment over and above the monthly payment. On typical long-term mortgage loans, a very big portion of the earlier payments will go towards paying down interest rather than the principal. Any extra payments will decrease the loan balance, thereby decreasing interest and allowing the borrower to pay off the loan earlier in the long run. Some people form the habit of paying extra every month, while others pay extra whenever they can. There are optional inputs in the Mortgage Calculator to include many extra payments, and it can be helpful to compare the results of supplementing mortgages with or without extra payments.
- Biweekly payments—The borrower pays half the monthly payment every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of mortgage repayments during the year. This method is mainly for those who receive their paycheck biweekly. It is easier for them to form a habit of taking a portion from each paycheck to make mortgage payments. Displayed in the calculated results are biweekly payments for comparison purposes.
- Refinance to a loan with a shorter term—Refinancing involves taking out a new loan to pay off an old loan. In employing this strategy, borrowers can shorten the term, typically resulting in a lower interest rate. This can speed up the payoff and save on interest. However, this usually imposes a larger monthly payment on the borrower. Also, a borrower will likely need to pay closing costs and fees when they refinance.
Reasons for early repayment
Making extra payments offers the following advantages:
- Lower interest costs—Borrowers can save money on interest, which often amounts to a significant expense.
- Shorter repayment period—A shortened repayment period means the payoff will come faster than the original term stated in the mortgage agreement. This results in the borrower paying off the mortgage faster.
- Personal satisfaction—The feeling of emotional well-being that can come with freedom from debt obligations. A debt-free status also empowers borrowers to spend and invest in other areas.
Drawbacks of early repayment
However, extra payments also come at a cost. Borrowers should consider the following factors before paying ahead on a mortgage:
- Possible prepayment penalties—A prepayment penalty is an agreement, most likely explained in a mortgage contract, between a borrower and a mortgage lender that regulates what the borrower is allowed to pay off and when. Penalty amounts are usually expressed as a percent of the outstanding balance at the time of prepayment or a specified number of months of interest. The penalty amount typically decreases with time until it phases out eventually, normally within 5 years. One-time payoff due to home selling is normally exempt from a prepayment penalty.
- Opportunity costs—Paying off a mortgage early may not be ideal since mortgage rates are relatively low compared to other financial rates. For example, paying off a mortgage with a 4% interest rate when a person could potentially make 10% or more by instead investing that money can be a significant opportunity cost.
- Capital locked up in the house—Money put into the house is cash that the borrower cannot spend elsewhere. This may ultimately force a borrower to take out an additional loan if an unexpected need for cash arises.
- Loss of tax deduction—Borrowers in the U.S. can deduct mortgage interest costs from their taxes. Lower interest payments result in less of a deduction. However, only taxpayers who itemize (rather than taking the standard deduction) can take advantage of this benefit.
The (shocking) Truth Behind 40 Year Mortgages
FAQ
Are 40-year mortgages still available?
What is the main disadvantage of the 40-year loan term for the buyer?
Do 40-year mortgages have higher interest rates?
Does FHA do 40-year mortgages?