What is a 40-Year Mortgage?

What is a 40-Year Fixed Rate Mortgage?

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If you’ve been house hunting before, or even paying attention to some of the commercials for mortgage products, you’ve no doubt seen tons of references to the 30-year mortgage. This is the gold standard and default mortgage for most of the industry, but it’s not the only loan out there. In fact, it’s not even the longest term mortgage available.

There’s another loan that no one really talks about these days: the 40-year mortgage.

Understanding the 40-Year Mortgage

A 40-year mortgage is exactly what it sounds like: a mortgage that has a term of 40 years. Theoretically, you can get them with either an adjustable or fixed rate, but the adjustables are pretty rare because of the on-paper risk. The 40-year mortgage became a pretty popular product in the run-up to the real estate market collapse in 2007 because home prices were rising dramatically and home buyer incomes were not keeping up. The longer-term meant a smaller payment in the short run, allowing more buyers to qualify.

But today, the 40-year mortgage is a different beast. It’s now only available through lenders who deal in non-qualified mortgages (mortgages that don’t meet certain standards created to protect consumers). NQ mortgages can be pretty risky, for both the lender and the home buyer because they each have some kind of feature that makes them a bit of a last resort. In the case of the 40-year mortgage, it’s that little payment and the extended repayment period. This is both the best and worst thing about them.

Looking at the Numbers

If you’re considering a 40-year mortgage, it’s important to compare it head to head with other, more readily available (and Qualified) mortgages. Below, you’ll see a chart that has some information about how these different loans play out over time. Assuming a 4.63 percent interest rate on all three (it’s not likely in the real world that they’d have the same rate) and a 10 percent down payment on a $369,900 purchase, the differences between a 15-, 30- and 40- year mortgage are substantial.

Differences in Accumulated Equity and Interest Over Time Based on Mortgage Terms (Assuming $369,900 purchase, 10% downpayment, 4.63% interest)

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When you’re paying off a mortgage, it’s important to note that you’re going to be paying mostly interest at first. This is one big reason why shorter terms are more desirable -- you get out of that interest-heavy payment period faster. As you can see on the chart, the interest paid on a 30-year mortgage after five years at $72,548.83 isn’t too dissimilar to the $73,933.13 on the 40-year, but the amount of equity that has been reclaimed is dramatic. This is because there’s more being applied to the principal with each payment.

After 10 years of payments, the gap widens further, even as the interest stays more or less the same. You can balance things out by paying extra, but you’ll have to be disciplined and really stick to the plan. You’ll retain the minimum payment of the 40-year note, but be paying it down faster. Make sure your loan doesn’t have a prepayment penalty before you try this, though.

If you don’t intend to hold on to your house for long, or need a smaller payment to be able to qualify due to a high debt to income ratio, choosing the 40-year with plans to refinance quickly could also make perfect sense. However, before you jump to any Non-Qualified product, you should always consider the Qualified ones, including 10/1 and 7/1 ARMs. Often, the interest rate difference is enough to get you over the hump.


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