Is a 40-Year Mortgage for Real? How and When You Might Consider One
The most common type of mortgage for first time home buyers and longtime homeowners alike is the U.S. is the classic 30-year fixed-rate home loan. The 15-year fixed-rate mortgage is another popular home loan option, followed by the somewhat less common 20- and 25-year mortgages.
One of the types of mortgages that’s a lot less talked about is the 40-year mortgage -- and no, it isn’t a fairy tale or myth. 40-year mortgages do exist, but that doesn’t mean that they’re a good choice for everyone.
We’ll break down the pros, cons, and secrets of the 40-year fixed-rate mortgage (since most 40 year mortgages are fixed rate), and help you decided if it’s a good idea for your individual situation.
Benefits of the 40-Year Mortgage
When compared to 15-, 20-, 25-, and 30-year mortgages, the 40-year mortgage is king when it comes to letting you get the largest (and most expensive) house. Since your mortgage will be spread over 40 years, you can purchase a pricer home for the same monthly payment.
Alternatively, you can purchase the same home you would with a 30-year mortgage for a significantly reduced monthly payment. While there are actually 50-year mortgages out there, too, they’re even more rare than 40-year home loans.
How a 40-Year Mortgage Allows You to Buy More
When looking into any mortgage, especially a 40-year mortgage, it pays to understand what’s going on in the mind (or minds) of the lender that might be approving your loan.
One of the main factors that goes into home loan approval is your debt-to-income (DTI) ratio. Your DTI ratio is made up of all of your fixed monthly debt expenses. This includes your potential mortgage loan (plus insurance and any HOA fees), car payments, student loans, minimum credit card payments, medical debt, and any other debts you might have.
Since a 40-year mortgage has lower payments for the same loan size, your DTI will be proportionally smaller for the same loan amount. This is how 40-year mortgages allow you to borrow more money with the same amount of income. Right now, most lenders (including those for 40-year loans) prefer borrowers with 43% DTI or less, though some borrowers may accept up to 50% for highly qualified applications (i.e. someone with a really great credit score).
Tax and Interest Benefits of a 40-Year Mortgage
A 40-year mortgage doesn’t just allow you to buy more house. It has other benefits, too. If you have a high income, you can write off the additional mortgage interest that comes on your 40-year mortgage on your taxes.
Plus, since interest rates often tend to go up over time, getting a 40-year mortgage allows you to lock in your interest rate for a very long period (just make sure to lock in your interest rate when rates are low).
All this means that a 40-year mortgage could be a particularly good idea if you love your home and want to stay there a very long time.
Drawbacks of the 40-Year Mortgage
Just as the 40-year mortgage has a variety of upsides, it also has some significant drawbacks. One of the biggest disadvantages of the 40-year mortgage is the fact that interest rates will be higher. Therefore, it’ll take you a lot longer to build up significant equity in your home, because a higher proportion of your mortgage payments will go toward interest.
This means that a 40-year mortgage can often be a poor choice for anyone who wants to sell their home within the next 10-15 years. A 40-year mortgage may even make it more difficult to get a home equity loan or HELOC later on, since there may not be that much equity in the property yet.
Plus, 40-year mortgage lenders are somewhat more difficult to find than those who serve up the more popular 15- and 30- year notes. And, since there are fewer 40-year mortgage lenders, there’s slightly less competition, so it may be a little harder to negotiate for a better deal with your lender.
Alternatives to the 40-Year Mortgage
If you’re looking into a 40-year mortgage to reduce your monthly payments, it pays to explore ways to do this that don’t involve a four-decade commitment to your lender.
While it may sound obvious, the first thing to consider is purchasing a less expensive home with a 15- or 30-year mortgage instead. That way, when you do start paying your mortgage, more of your payments will go to building up your home equity.
Then, once you’ve built up your savings (and perhaps increased your income, as well), you can buy a nicer and more expensive home without such a long-term commitment.
Some Borrowers May Prefer an Interest-Only Loan to a 40-Year Mortgage
Alternatively, if your income is low right now due to temporary expenses (i.e. medical bills, college tuition, etc.), or you’re confident that your income will increase significantly in the next few years, you may want to look into an interest-only loan.
Much like 40-year mortgages, interest-only mortgages can keep your monthly payments low at the start, which means you can be approved to purchase a more expensive home. Despite starting out with low payments, interest-only mortgages have serious drawbacks. You won’t be paying anything toward the principal of your home during the interest-only period, so you won’t be building any home equity at all. And, in many cases, you’ll just be putting off the inevitable; when the interest-only loan ends, you’ll likely either have to refinance your loan into a traditional mortgage, sell your home, or cough up the cash to pay off the rest of your loan balance then and there (which is rarely possible for most homeowners).