What is a 40-year mortgage, and why is it so hard to find a lender that offers them?

It’s exactly what it sounds like—you extend the usual mortgage term by 10 years. Much like the difference between a 15-year mortgage vs. a 30-year mortgage, this will lower your monthly payments. But is a 40-year mortgage the best option for you?

While the lower monthly payments may seem appealing, you'll want to weigh the long-term implications carefully. It's essential to calculate the trade-offs between the benefits and drawbacks of this type of loan. Before committing, understanding how it aligns with your financial objectives and exploring other strategies to optimize your mortgage can make a significant difference in the overall cost and financial outcomes.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Main Points

• 40-year mortgages have lower monthly payments due to the extended terms.
• They also usually have higher rates, and you’ll pay much more in interest overall.
• Most lenders don’t offer 40-year mortgages because it’s a non-qualified mortgage.
• Explore alternatives like loan modifications to save on costs.
• Carefully consider the financial implications before opting for a 40-year mortgage.

What Is a 40-Year Mortgage Loan?

A 40-year loan is a type of non-qualified mortgage—that is, it doesn’t conform to standards set by the Consumer Financial Protection Bureau. These standards include strict borrower evaluation guidelines (the Ability to Pay rules) and limitations on lender practices to ensure that most borrowers are able to repay their loans on time. Some guidelines and non-qualified loans that don't follow them are:

• Not going over a certain loan amount (jumbo loans)
• Requiring some of the principal to be paid each month (interest-only loans)
• Mortgage terms can’t go longer than 30 years (40-year loans)

Balloon payments and negative amortization are other examples of non-QM loans.

Because a 40-year loan is a non-QM loan, the lender has more flexibility in underwriting guidelines. This allows them to serve borrowers who, for example, don’t have a predictable income and want lower monthly payments, or are in financial hardship.

A 40-year mortgage loan extends the traditional repayment period to 40 years, allowing the lender to lower your monthly payments at the cost of a higher interest rate and more interest paid overall.

When considering a 40-year loan, you should weigh the pros and cons carefully. Lower monthly payments may seem appealing, but remember that you'll end up paying more in interest over the extended term, and you’ll be making those monthly payments significantly longer. Your overall costs will be significantly more expensive.

It's crucial to research and compare your mortgage options to make an informed decision.

Pros

A 40-year loan provides borrowers with a feasible option for managing monthly payments effectively while navigating financial constraints. 40-year mortgage loans offer lower monthly payments compared to shorter-term options, increasing your buying power and providing more flexibility in your budget.

With 40-year mortgage rates, you can benefit from reduced immediate financial strain, allowing you to allocate funds to other essential expenses. This type of loan can be particularly advantageous if you're facing temporary financial difficulties or seeking a long-term affordable payment solution.

Because it’s a non-qualified loan, it’s also available to homebuyers who may not qualify for a traditional mortgage loan, whether for their credit score, an unusual income stream, or other reasons.

Cons

If you opt for a 40-year loan, be aware of the potential drawbacks that come with this extended payment term. While it may offer lower monthly payments, the longer loan period means you'll pay significantly more in interest over time compared to shorter-term loans. 40-year mortgages typically come with higher interest rates and you’ll be paying them a full decade longer, making them more expensive in the long run.

Similar to land loans, 40-year mortgages can be harder to find as they aren't as common among lenders. Because it’s a non-qualified loan, most banks and established mortgage lenders don’t offer them.

Keep in mind that with a 40-year mortgage, equity builds up slower, impacting your ability to build wealth through homeownership.

Consider the higher total loan costs and the impact it may have on your financial situation before committing to this type of loan.

Where Can I Get a 40-Year Mortgage?

While there are lenders out there who offer 40-year mortgages outright, it might be easier for you to ask your current lender about modifying your current loan.

If you’re having trouble paying your current mortgage with conventional terms, your lender might help you extend your mortgage term to 40 years to help lower payments—in addition, they might also lower your interest rate, the total amount you owe, or both. This can save you money compared to going for a 40-year mortgage from the start.

Several conventional mortgage options have 40-year extension options. Both FHA loans and VA loans can be converted to 40-year loans if you’re struggling to make payments.

Loan modifications like the Flex Modification Program help struggling homeowners with traditional Fannie Mae and Freddie Mac-backed mortgages. Many lenders have their own in-house modification options, so be sure to ask about them.

40-Year Mortgage vs. 30-Year Mortgage

When comparing mortgage terms, opting for a 40-year mortgage over shorter terms like 30 years or 15 years can significantly impact your monthly payments and overall interest costs. While a 40-year mortgage offers lower monthly payments due to the extended repayment period, it also comes with higher interest rates, leading to more interest paid over the life of the loan. This extended term can provide you with more flexibility in managing your finances, but it's essential to consider the long-term financial implications.

On the other hand, choosing a shorter mortgage term may result in higher monthly payments but a lower overall loan cost. With a 30-year mortgage, you'll pay off the loan sooner, pay less in interest, and build equity in your home faster. This option and the 15-year mortgage, which has even higher monthly payments, are generally favored by borrowers looking to minimize the amount of interest paid over the life of the loan and aiming for quicker homeownership.

To help visualize the true cost of a 40-year mortgage, let’s calculate an example using the same interest rate.

Consider your financial goals and current situation to determine which mortgage term aligns best with your needs.

Alternatives to a 40-Year Loan

A 40-year loan can be costly in the long run, but also provides an immediate solution if you need lower monthly payments. Before you commit, consider these alternatives:

Paying Points on a Mortgage

Lenders will typically allow you to pay some money up front to lower your interest rate over the long term. This is called a “mortgage point.” Typically, a mortgage point costs 1% of your total loan amount and lowers your interest rate by 0.25%—which also lowers your monthly payment. Here’s what the savings look like on that:

In this case, paying $2,000 for one point equals a savings of $12,027.17 over the life of the loan. Paying an additional point ($4,000 total) to lower the rate to 6.5% would grant a total savings of $23,928.82.

Mortgage lenders will typically set a limit on the number of points you can buy (often three or fewer). Generally, you can buy fractions of a point as well as full points.

When should you buy points on a mortgage?

• You plan to keep the home for a long time: if you sell before you break even on your monthly savings, you’ll lose money.
• You don’t plan to refinance soon: refinancing means a new loan, so you could end up paying points twice.
• It saves you money compared to a bigger down payment: when you calculate points savings, also calculate whether you could lower your interest by paying an extra few thousand on your down payment instead—borrowing less means paying less.
• You plan to make bigger mortgage payments: points save money over time, so paying your mortgage faster eats into your potential savings. Calculate both options.

Don’t confuse mortgage discount points and mortgage origination points. The latter are fees that a lender charges for giving you a loan. They aren’t optional and don’t affect your interest rate.

Down Payment Assistance

Lowering the amount you borrow will naturally lower your monthly payments. Research down payment assistance programs in your local area. For example, there are statewide DPA programs in Tennessee and several city-specific programs.

Having a down payment over 20% will also eliminate the need for Private Mortgage Insurance.

Adjustable-Rate Mortgage

If you think you’ll move soon or you’ll be able to make larger payments in a few years, it could be worth looking into adjustable-rate mortgages. Many ARMs have a lower interest rate than a fixed-rate mortgage for the first several years—sometimes up to 10 years—before the rate adjusts.

An ARM runs the risk of the mortgage rate increasing after the initial fixed period, but it’s also possible that mortgage rates could go down, or you’ll sell the home before the fixed period ends.

Loan Modification

If you have an existing mortgage but are having difficulty making monthly payments, talk to your lender about your options. It’s in your lender’s best interest for you not to default on your loan, so they may be more willing to work with you than you might think.

Your lender may work with you on extending the loan term, adjusting the interest rate, deferring missed payments, switching from a variable to a fixed rate, or even lowering the amount you owe outright to help you reduce your monthly payments to a level you can afford.

Frequently Asked Questions

Can I Refinance a 40-Year Mortgage Into a Shorter Term?

Yes, you can refinance a 40-year mortgage into a shorter term. Consult your lender for options and assistance in transitioning to a different loan term that better suits your financial goals and circumstances.

Do 40-Year Mortgages Have Prepayment Penalties?

You may or may not pay a prepayment penalty on a 40-year mortgage. Like all mortgages, different lenders may have different policies. If you’re modifying a government-backed loan like a VA or FHA loan, you probably won’t have a prepayment penalty. Confirm details with your lender. Understand the terms fully to avoid unexpected costs if you plan to pay off the loan early.

Can I Get a 40-Year Mortgage With a Low Credit Score?

You can potentially get a 40-year mortgage with a low credit score. Because it’s a non-qualified mortgage loan, lenders are allowed to have looser credit score requirements. Be aware that you may pay higher interest rates to offset the lender’s risk; consider improving your credit score before applying.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Should You Get a 40-Year Mortgage?

A 40-year mortgage can be a beneficial option for managing monthly payments and increasing buying power, but it's essential to consider the potential drawbacks, such as higher interest costs and slower equity build-up.

When comparing to shorter terms, weigh the impact on monthly payments and interest expenses. Explore alternatives like loan modifications and paying points to save costs in the long run.

Make sure to align the term choice with your financial goals for a successful home loan experience.