A 40-year mortgage isn’t a standard home loan, but they are becoming more common as home prices rise. These mortgages can help you get into a new home sooner and can reduce your monthly mortgage payments, but they’re also much costlier over time and come with stricter lending requirements.
In general, 40-year mortgages aren’t a good option for most buyers. But there are situations where they make sense, so it’s useful to understand how they work. Below, we’ll explain 40-year mortgages in detail along with who they’re right and wrong for.
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What is a 40-year mortgage?
A 40-year mortgage is exactly what it sounds like: instead of paying off your mortgage over the standard 15- or 30-year term, you’ll have 40 years. Because your payments will be spread out over four decades, your monthly mortgage payments will be lower.
But there’s a hidden cost to these lower payments. Over time, you’ll end up paying more in interest than you would with a shorter mortgage term. Plus, 40-year mortgages are a type of non-qualified mortgage—or non-QM for short—which means they’re not standard mortgages.
Non-QM loans are typically more flexible and are suited for buyers who may struggle to qualify for a standard mortgage, such as self-employed workers. However, they often require higher down payments, charge higher interest rates, and enjoy fewer protections from the federal Consumer Financial Protection Bureau (CFPB).[1]
Comparing 40-year vs. 30-year mortgages
To give you a better idea of how much you’ll end up paying with a 40-year mortgage vs. a 30-year mortgage, let’s look at them side-by-side:
| Term | Amount | Interest rate | Monthly payment | Total interest |
|---|---|---|---|---|
| 30 years | $400,000 | 6.75% | $2,593 | $533,548 |
| 40 years | $400,000 | 7.00% | $2,398 | $751,040 |
| Difference | $0 | +0.25% | -$195/month | $217,492 |
As you can see, with a 40-year mortgage on a $400,000 loan you’ll be paying nearly $200 less per month than if you had a 30-year mortgage. That’s despite the fact that your interest rate will likely be higher with the 40-year mortgage.
However, over time your interest costs really add up. By the time you’ve paid off your mortgage, you’ll have lost an additional $217,492 to paying interest with a 40-year mortgage compared to the 30-year one.
Why 40-year mortgages don’t usually make sense
For most home buyers, 40-year mortgages don’t make much financial sense and not just because you’ll lose an exponential amount of money through interest over time. Other reasons why these longer borrowing terms might not work for you include the following:
- Strict lending requirements: As mentioned, a 40-year mortgage is a non-QM loan, which means it often has stricter requirements, such as a higher credit score, larger down payments, or higher interest rates. While non-QM loans are more accessible to borrowers who may not qualify for standard mortgages, the irony is that these stricter requirements can actually make them more difficult to qualify for overall.
- Limited availability: Unlike 30-year mortgages, 40-year mortgages are not available at a lot of banks and credit unions. This limited availability doesn’t just make 40-year mortgages harder to find, it also means there’s less competition for them among lenders. That reduced competition can result in less favorable terms and higher rates.
- Affordability: According to our research on home affordability, the typical American household earns just 70% of the income required to afford a home at the median price of $438,000. While 40-year mortgages have lower monthly payments, their higher down payment requirements and higher interest rates make them less affordable for most Americans in the long run.
- Harder to build equity: A 40-year mortgage makes it harder to build equity since it will take you longer to pay off the principal of your loan. Especially in the early years, a larger percentage of your monthly payments go toward interest rather than the principal. If you want to sell or refinance, you’ll have less equity to tap into and you could even be underwater on your home. You’ll need to understand what happens to your mortgage when you sell in order to make sure you have sufficient equity.
Interest rate differences and why they matter
As mentioned, 40-year mortgages are a non-QM loan, which means they typically have higher interest rates than standard mortgages. According to Fitch, non-QM loans can have interest rates up to two percent higher than their standard counterparts.[2] Lenders charge these higher rates because there’s more uncertainty over longer time periods, such as fluctuating property values and the borrower’s ability to repay.
Not only are you dealing with higher interest rates, but you’ll be stuck with them for a longer term, especially if you’ve locked yourself into a fixed-rate mortgage. Over time, these higher interest rates combined with a longer loan term add up.
As we saw above, just a 0.25% difference in interest rates with a 40-year mortgage vs. a 30-year mortgage resulted in over $217,000 in additional interest costs. If the interest rate had been 1% higher, total interest costs would’ve been over $365,000 with a 40-year mortgage. In some markets, that’s enough money to buy an entire house outright!
Can you get a 40-year mortgage that makes sense?
Despite costing more money over time, there are situations where a 40-year mortgage makes sense.
Dealing with financial hardship
A 40-year mortgage is often issued as a loan modification instead of for a new home. If you’re struggling with your current mortgage, talking to your lender and getting a loan modification for a 40-year term may give you some breathing space.
According to the U.S. Department of Housing and Urban Development, most mortgage defaults are the result of a sudden and unexpected financial strain, such as a job loss or medical emergency. Reducing monthly mortgage payments by at least 10% consistently results in lower default rates.[3]
For homeowners who are worried about how many mortgage payments you can miss before foreclosure, a 40-year loan term that results in lower monthly payments is usually a better option than defaulting.
Borrowers who can’t qualify for standard mortgages
There are many situations where borrowers may have the financial means to pay for a mortgage, but for whatever reason cannot actually qualify for one. For example, if you’re self-employed or work in the gig economy, many lenders will be hesitant to give you a standard mortgage. In that case, a non-QM loan, like a 40-year mortgage, might be more suitable.
Similarly, if you have a high debt-to-income ratio, it might be difficult to qualify for or even afford a 30-year mortgage. You can work with a high DTI mortgage lender to find a more suitable non-QM option that gets you onto the property ladder sooner while still taking advantage of lower monthly mortgage payments.
Borrowers who plan to refinance later
If you currently don’t have the financial means to qualify for a standard mortgage, you can use a 40-year mortgage as a stopgap measure and refinance later. With this strategy, you can get a 40-year mortgage in order to buy a property today and later, when your financial situation has improved or interest rates are lower, you can refinance to a 30-year mortgage.
However, you’ll need to be proactive about keeping an eye on interest rates for 30-year mortgages and having a plan for improving your financial health. Also, keep in mind that refinancing comes with closing costs, so you’ll need to calculate whether the long-term savings through lower interest rates outweigh those upfront costs.
Bottom line: Is there a 40-year mortgage right for you?
Whether or not a 40-year mortgage is right for you depends on your current financial situation. If you want to get on the property ladder but you can’t qualify for a standard mortgage, then a 40-year mortgage can provide a potential lifeline although you’ll end up paying for it over time. Similarly, you may want to consider a 40-year mortgage as a temporary way of reducing your monthly payments if you’re facing default.
However, the 40-year mortgage comes with significant drawbacks. Your interest rates will be higher and you’ll take longer to build up equity in your home. By the time you do pay off your home loan, you’ll have lost significantly more money through interest than you would have with a shorter loan.
Deciding on the type of mortgage that’s right for you is just one of the many important decisions you’ll need to make when buying a house. Having experienced real estate experts by your side throughout the journey can help you make the right choices.
With Clever, you can talk to licensed real estate experts and connect with a top local realtor who can guide you through the entire home buying process. Contact Clever today and get started with a top-rated agent near you.