Is a forty year mortgage even a thing? It’s hard to believe, but it is. However, don’t beat yourself up for not knowing about it.
The forty year mortgage isn’t your everyday type of mortgage. Therefore, it’s easy to see why it may sound strange. This blog will explain the basics of a 40-year mortgage, how it works, and if you should get one.
What Is a 40-year Mortgage?
A 40-year mortgage is simply a mortgage that allows you to extend the life of a regular loan (30 years) by up to a decade. That means you get to spread your mortgage payments over 40 years.
Consequently, the monthly mortgage repayments are lower than the norm. However, there’s a catch. Opting for a 40-year mortgage means you’ll have to pay higher interest.
But why are 40-year mortgages so hard to find? Most financial institutions don’t include it in their available mortgage programs — thanks to the “unqualified” label on it from the Consumer Financial Protection Bureau.
If this is true, how then can I find a 40-year mortgage lender? You’ll find out as you keep reading.
Types of 40-year Mortgages
There are three primary types of 40-year mortgage. Depending on the one you go for, you either get to pay a fixed interest rate or go for an adjusted interest rate. The three types of 40-year mortgage are:
Your 40-year mortgage rates are stagnant throughout repayment. This plan is similar to a regular 15 or a 30-year fixed-rate mortgage, the difference only being the extra ten years.
When you take an adjustable-rate mortgage (ARM), your interest rate adjusts with the market. You might start by paying four percent for the first five years. Then your loan interest rate will adjust accordingly to the market over the next five years and throughout the life of your loan.
These interest changes might affect your loan and add rate increases to your worries. This rate increase may be up to five percent and last as long as your mortgage.
The interest-only mortgage requires you to pay only the interest during the first ten years of your mortgage and then pay the principal afterward. This settlement scheme will make it look like a 30-year fixed-rate mortgage during the latter stages of your payment term.
However, this plan is risky because you aren’t building home equity for the first decade of your repayment term. After the first ten years, you risk paying a higher interest rate by taking interest-only loans. You are also at the risk of default because you will not have paid any of the loan principal for the first decade.
Now that you know the types of forty year mortgages, it’s also important to learn if opting for a 40 year mortgage is worthwhile. In the following sections, you’ll learn some of the reasons to consider taking one as well as why 40 year mortgages might be risky.
40 Year Mortgage: Reasons to Take One
Like other mortgages, a mortgage with a 40-year term has many advantages and disadvantages. Here are common pros of a 40-year mortgage to keep in mind when applying for one.
Lower Monthly Payments
The first advantage of a forty year mortgage over other mortgage types is the lower monthly payment. Suppose you get a mortgage worth $180,000 at 2% interest over 25 years, your monthly payment will be $763.
If you take the same amount of mortgage at the same interest rate over a 40-year term, you will be paying around $545. You save over $200 a month to increase your disposable income. A 40-year mortgage is beneficial for most borrowers who may experience difficulties with their monthly mortgage payments.
Easier to Pass Affordability Tests
Applying for a 40-year mortgage makes it easier to pass affordability tests. A lender will typically conduct affordability tests to determine the likelihood of a borrower paying off their debts. It will be easier to convince lenders that you can afford monthly payments if they are lower.
Apart from determining your repayment eligibility, a credit union will also check to see if you can meet other expenditures like maintenance fees and property taxes. If you fail the test, the lender might decide not to finance the mortgage.
You Save More Money
Interest-only loans provide you with a means to save some of your personal finance during the first ten years because it is an interest-only tenure, and you won’t be paying as much as you would during the latter stages of your loan tenure.
40 Year Mortgages: Reasons Not to Take One
Longer Payment Term
Taking a 40-year mortgage over a shorter-term loan means you will be in debt for longer unless you request a modification. If you want to relieve your debt burden sooner rather than later, then a 40-year mortgage is not for you.
Most lenders will not lend for 40-years unless you can prove that you have a monthly budget to service the debt over a 40-year term. Having homeowners insurance will also increase the chances of getting your mortgage approved.
Slow Equity Build
In a 40-year mortgage, equity builds slowly. This slow equity build is because most of your monthly payments cover interest rather than the principal in the first ten years of an interest-only loan. As such, the rate of building home equity is slower than that of a short-term loan.
Higher Interest Rates
You will be paying more interest over a 40-year loan term than you would a 15 to 30 year loan term. The extra ten years of your mortgage term means more profits for the bank.
Most banks and credit unions don’t offer 40-year mortgages because of the lengthy payment term and the CFPB legislation not recognizing loans with such a prolonged duration.
Large Payment Swings
You might also find yourself paying larger monthly payments during the latter part of your loan term if you opt for an interest-only loan because of the extension of the loan term.
In an adjustable-rate mortgage, you may need to pay more if your rate increases. Remember, longer timelines may spell more rate increases.
These points sum up the pros and cons of taking a 40-year mortgage. In the next section, you’ll learn about 40-year mortgage refinances with information on how you can request a mortgage refinance on your existing mortgage.
What’s a 40 Year Mortgage Refinance?
Depending on your financial situation, you can choose to refinance your current mortgage into a 40-year mortgage term if your lender offers it. The refinancing will extend your existing 15 or 30-year mortgage plan to a 40-year mortgage.
This modification will lead to a lower monthly payment, but you may need to pay extra interest over the life of the loan, depending on which stage of your initial loan you choose to refinance.
You may also need to cover usually expensive closing costs. However, since most lenders don’t offer a 40-year loan, they’ll likely not support a refinance.
Loan Modification for 40 Year Mortgages
Loan modifications adjust the terms of your mortgage. Lenders may agree to reduce the interest or modify the loan structure. In particular financial circumstances, mortgage lenders might decide to set aside some of your principal for later.
All these mechanisms are mainly to make your loan easier to pay. If you are on a 30-year mortgage, some lenders may allow you to extend the payment term to 40 years to make it more manageable.
You should note that applying for a modification affects your credit score. You can use a 40-year mortgage calculator to calculate your mortgage balance to understand the amendment terms.
Where Can I Get a 40 Year Mortgage?
Some financial institutions like the Bank of America offer 40-year mortgages. However, they may not include it in their list of easily accessible mortgage plans, and this is because they only provide it on particular loans like jumbo home loans.
You can try talking to a real estate attorney to explore the possibility of getting a 40-year mortgage from your current provider. If that isn’t possible, you can try some alternatives, easily accessible by searching for a 40-year mortgage on any search engine.
Should You Take a 40-year Mortgage?
You may consider taking a 40-year mortgage if your monthly budget can’t keep up with the higher monthly payments associated with shorter-term home loans. While adjustable-rate mortgages might be tempting in a climate of low interest rates, you should be careful.
In an adjustable-rate mortgage, you won’t be paying the same monthly payment throughout the life of the loan. Before taking a 40-year mortgage, carefully weigh the pros and cons to determine if it’s favorable for you.
Alternatives to 40 Year Mortgages
Instead of taking a 40 year home loan, you may want to consider opting for shorter-term mortgages. You may also pay mortgage points upfront to reduce interest rates, which will reduce your monthly payments later in the loan’s lifetime.
Most mortgage lenders accept mortgage points. Short-term adjustable-rate mortgages may offer lower rates at the beginning of your mortgage. With this, you get to save more and increase your credit, and you can refinance the home loan into a fixed-rate mortgage before the adjustable-rate mortgage resets.
After weighing all the pros and cons of a 40-year mortgage, you’ll discover it isn’t much different than shorter-term mortgages of 15 or 30 years. Although there are lower monthly rates and the like, you may potentially be in debt for an extra ten years.
You may also end up paying a higher interest rate than you would with a shorter mortgage which doesn’t sound good if you are in a bad financial situation. Before applying for a 40-year mortgage, having homeowners insurance will help increase your chances of getting approved.
Consider comparing your budget to your potential monthly payments before applying for a loan to ascertain whether or not you can effectively service the loan.