Taking out a mortgage is one of the biggest financial decisions we make in life. Most home loans come with 15 or 30 year repayment terms, but 40 year mortgages are becoming an increasingly popular option for buyers. In this article, I’ll explain what 40 year loans are, their pros and cons, and how to use an online calculator to estimate your monthly payments.
What is a 40 Year Mortgage?
A 40 year mortgage is simply a home loan with a repayment term of 40 years, rather than the more common 15 or 30 years The longer repayment period results in smaller monthly payments, making 40 year loans more affordable However, you end up paying more interest over the full loan term.
40 year mortgages can be fixed or adjustable rate The interest rates are typically higher than 30 year loans because of the increased risk to the lender The longer payback period means more things can go wrong over 40 years vs 30 years,
The Pros and Cons of 40 Year Mortgage Loans
Pros
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Lower monthly payments – Spreading repayment over 40 years reduces your monthly mortgage costs significantly compared to 30 or 15 year loans. This helps buyers who are stretching their budget.
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Buy a more expensive home – The lower payments allow you to qualify for a bigger mortgage and buy a more expensive house.
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Pay off mortgage before retirement – A 40 year term means you’ll hopefully pay off your home before retirement age, whereas a 30 year loan would extend into retirement
Cons
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Pay more interest – By taking twice as long to pay off your mortgage, you’ll pay a lot more in interest charges over the 40 years.
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Less equity build up – Equity is the portion of your home you actually own. With slower equity build up, it takes longer to accumulate wealth through your property.
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Higher interest rate – Lenders charge a higher rate compared to 30 year mortgages because of the added risk over a longer term.
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Mortgage lasts into retirement – There’s a chance you may not pay off the loan before retirement age, which can be problematic living on a fixed income.
How an Online 40 Year Loan Calculator Works
Online calculators are handy tools to get an estimate of your mortgage costs. They only take a few minutes to use. Here’s a quick overview of how they work:
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Enter your loan amount, term length (40 years), and estimated interest rate.
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Enter your approximate start date so it can calculate when payments will begin.
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Click calculate to see the estimated payment amount.
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Review the full amortization schedule showing the breakdown of interest and principal each month.
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Change the loan details to see how payments vary. For example, adjust the interest rate, loan amount, or start date.
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Use the share or export features to save your results.
These online calculators use sophisticated financial formulas to estimate your mortgage costs. They provide far more detail than doing manual calculations yourself.
I recommend playing around with different loan amounts and interest rates. This gives you a solid idea of what monthly payments to expect when you actually go to take out a mortgage.
A Detailed Example Using a 40 Year Loan Calculator
Let’s go through a detailed example to see how a 40 year mortgage calculator works in action:
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Loan amount – Let’s say we input a $300,000 mortgage amount into the calculator.
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Loan term – We enter a 40 year repayment term.
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Interest rate – We estimate a rate of 5.0% for this example. Rates fluctuate daily.
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First payment date – We input a future date of January 2025 when we plan to start repaying this hypothetical loan. This calculates when the payments will begin.
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Calculating results – After entering the above details, we click calculate to see the results:
- Monthly payment = $1,584
- Number of payments = 480
- Total interest = $493,821
- Total loan cost = $793,821
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Amortization schedule – The calculator generates a full repayment schedule showing how the loan balance reduces over time as we make payments. We can scroll through the schedule to see the breakdown of interest and principal each month.
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Adjusting inputs – We can tweak the loan details to model different scenarios. For example, raising the interest rate to 5.5% increases the monthly costs by $100. Reducing the mortgage amount to $250,000 drops the payment by $300 per month.
Playing with the numbers gives us a solid feel for how 40 year mortgage loans work. When we’re ready to speak to lenders, we’ll have realistic expectations of monthly payments for different loan amounts.
Tips for Reducing Interest Costs on a 40 Year Home Loan
While 40 year mortgages have lower monthly payments, the long repayment timeline results in high interest charges. Here are some tips to reduce the total interest paid:
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Make additional payments – Making extra principal payments reduces your overall interest costs. Even small additional contributions add up over 40 years.
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Refinance at a lower rate – When rates drop in the future, refinancing to a lower rate can slash your total interest paid. Make sure to weigh closing costs.
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Shorten the term later – If finances improve, you can refinance to a 30 or 20 year term later to pay off the mortgage faster.
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Only borrow what you need – Don’t take out a bigger mortgage than required just because the payments are lower. Borrowing too much leads to excessive interest.
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Make bi-weekly payments – Making half payments every 2 weeks each year saves interest by reducing principal faster.
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Round up payments – Some lenders let you round up each payment to the nearest $50 or $100. This small extra amount when compounded saves thousands in interest.
Being smart about minimizing interest charges ensures a 40 year mortgage remains affordable long-term. An online calculator helps give you an accurate picture of total costs.
Is a 40 Year Mortgage Right for You?
Deciding whether to get a 40 year home loan depends on your personal financial situation. The pros of lower payments need to be weighed against the higher long-term interest costs.
These mortgages are best for borrowers who value lower monthly payments and need to stretch their budget as far as possible. You should be comfortable knowing you’ll pay significantly more interest than with a shorter term.
On the other hand, if you want to build equity and pay off your home faster, a 30 year or shorter term is likely the better choice. Make sure to get quotes from multiple lenders and thoroughly evaluate the costs in your situation.
Use an Online Calculator to Estimate Your 40 Year Loan Payments
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?
Does FHA do 40-year mortgages?
How much is a $400 000 mortgage payment for 30 years?
What is a 40 year loan calculator?
40 Year Loan Calculator to calculate the interest and monthly payment for a fixed interest rate 40-year loan. The 40 year mortgage calculator will calculate the total interest payment and the overall costs of the mortgage. 40 Year Loan Calculator to calculate interest and monthly payment for a fixed interest rate 40-year loan.
What is a 40 year mortgage?
Just like a traditional 30-year mortgage, a 40-year mortgage could be on a fixed interest rate or adjustable-rate (ARM). On a fixed interest-rate 40-year mortgage, the borrower will be paying the same amount as his monthly payment throughout the loan terms.
How does a 40-year mortgage calculator work?
Review the Output: The calculator will display the monthly payment amount, helping users understand the financial commitment associated with a 40-year mortgage. Consider a scenario where a borrower takes out a $300,000 mortgage with an annual interest rate of 4.5% over a 40-year term.
How much does a 40-year mortgage cost?
On the other, you could choose a 40-year mortgage with an interest rate of 3.25%, leading to a monthly payment of $931.35 and a total cost of $447,049.48. As you can see, the total cost of the 40-year mortgage is dramatically higher.