Mortgages already seem like they last a lifetime. Typically, they range from 10 to 30 years and a 30-year mortgage is the most common for first-time homebuyers.
Should you consider a 40-year mortgage instead of a 30-year or even a 15-year mortgage? The answer to this question depends on your situation.
How does a 40-Year Mortgage Work?
When you decide to take out a 40-year mortgage to buy a home, it may come in a few different variations. Some will have a fixed interest rate throughout the entire term, while others may come with an adjustable rate.
A 40-year mortgage works much like any other mortgage, only the term is longer. Before you make your decision, it’s a good idea to understand the pros and cons of a 40-year mortgage
Pros of a 40-year Mortgage
1. Lower Monthly Payments
Since you will be paying on the mortgage for a longer amount of time, the monthly payments are going to be lower. For some homebuyers, a lower monthly payment could allow you to buy a more expensive home. It could be the only reason you’re able to go from renting to buying a house.
2. Ability to Buy a More Expensive Home
Since a 40-year mortgage offers lower monthly payments, you’ll likely qualify for a larger home loan. You’ll have more room in your debt-to-income ratio compared to the payment on a 30-year or 15-year home loan.
3. Better Than an Interest-Only Loan
If you don’t qualify for a traditional 30-year mortgage, you might consider an interest-only mortgage. These types of mortgages have you paying just the interest, which means the principal balance doesn’t go down.
A 40-year mortgage offers a better option since you’ll pay on it like a traditional mortgage. If you can only qualify for an interest-only mortgage, consider looking for a 40-year mortgage.
Cons of a 40-year Mortgage
1. Higher Interest Rates
Typically, a 40-year mortgage comes with a higher interest rate compared to a 30-year or 15-year mortgage. This could be a deciding factor if you believe the interest isn’t worth it.
Typically, you’ll have an interest rate of about 0.25% higher on a 40-year mortgage compared to a 30-year mortgage. However, you can always pay ahead and pay your home off faster than the 40-year term to avoid some of the interest.
2. Less Equity Quickly
Since the mortgage is stretched out another 10 years compared to a 30-year mortgage, you won’t build equity as fast. Your down payment and your home’s appreciation will help you build some equity, but it will take longer to pay down the principal on the mortgage.
It can be harder to sell your home sooner with a 40-year mortgage. If you plan to stay in your home for 10 years or longer, this may not be a big deal.
3. Harder to Find a Good Lender
Since 40-year mortgages don’t fit the standards of the Consumer Financial Protection Bureau, they are harder to find. This type of home loan is known as an unqualified loan, which some lenders will not offer because they are considered to be higher risk. The best places to look for 40-year home loans is through a credit union or a private lender.
4. Pay More for the Same Home
Since the mortgage is stretched out to 40 years, compared to a 30-year mortgage, you will pay more for the same home. You will be paying interest for an extra 10 years, so the cost of your home just went up, overall.
Comparing a 30-Year Mortgage to a 40-Year Mortgage
When you look at a comparison of a 30-year mortgage to a 40-year mortgage, it’s a bit easier to see the differences. Here’s the breakdown for a $250K home.
On a 40-year mortgage:
- Monthly Payment – $1,124
- Total Interest Charge – $289,477
- Total Cost of the Home – $539,477
On a 30-year mortgage:
- Monthly Payment – $1,267
- Total Interest Charge – $206,018
- Total Cost of the Home – $456,018
*This does not include the down payment amount, PMI, homeowners insurance, or property taxes
With a 30-year mortgage, you’ll save more than $80,000!
Before you decide to take out a 40-year mortgage to buy a house, consider all your options. You might be able to buy a less expensive home on a 30-year mortgage and work towards your dream home. It might also be possible to buy the home you really want just by saving more for a down payment and financing less.
If you’re considering a 40-year mortgage, make sure it’s not to buy a home you cannot afford. This is a huge decision and you want to ensure you’re making the right decision and while there are some benefits to a 40-year mortgage, there are some serious disadvantages, too.