What is a 40-Year Mortgage?
What is a 40-Year Fixed Rate Mortgage?
Whether you’re just considering buying your first house or you’re already shopping for your fifth, you’re likely familiar with mortgage terms. More specifically, you’re probably familiar with the 30-year mortgage. This loan term has become the standard for mortgages, and most mortgage lenders that advertise their loan products focus heavily on this one. As the name implies, it is a mortgage that you have 30 years to repay.
That said, it’s important to note that the 30-year mortgage isn’t the only option available when shopping for a home loan. It isn’t even the mortgage with the longest repayment term. If you’re looking for the longest term you can find on a home loan, you might want to find out more about 40-year mortgages.
What Is a 40-Year Mortgage?
As the name implies, a 40-year mortgage is a home loan that gives you a full 40 years to repay the loan plus applied interest. This often results in lower monthly loan payments due to the extra 10 years given to repay the loan versus more traditional 30-year mortgages. On the flip side, it also means an extra 10 years’ worth of interest accumulation, which means you’ll also end up paying more for the loan in total than you would for a 30-year mortgage.
Why Haven’t I Heard About This?
Despite their relative obscurity now, 40-year mortgages were once quite popular. They reached the peak of their popularity in the early 2000’s during a major boom in the housing market. Some lenders touted these loans as one of the best ways to buy a home without breaking the bank. The popularity of the loan dropped off sharply in 2007 when the housing market crash nearly toppled the economy and sent the United States tumbling into the Great Recession. The crash was the worst housing crash in U.S. history and affected economies around the world.
The housing market has recovered since then, though it took several years. Governmental regulations and banking trends shifted toward shorter-term loans that would be less likely to contribute to another major dip in the housing market. Bankers and government regulators prefer qualified mortgages, and these are the main loan products that you see advertised and talked about these days.
What Is a Qualified Mortgage?
A qualified mortgage is a home loan that meets criteria laid out by the Consumer Financial Protection Bureau (CFPB) to ensure that borrowers receive an affordable, stable loan. These criteria are designed to prevent borrowers from ending up with a loan that sounds attractive but that they ultimately cannot repay.
To meet the criteria of a qualified mortgage, a loan has to:
Fall within an acceptable debt-to-income ratio, meaning that it cannot expect you to pay more than a certain portion of your income toward repaying the loan.
Keep upfront costs (including points and fees) within a certain limit, based on the amount that you borrow. Note that this limit doesn’t cover some expenses such as some loan insurance premiums.
Avoid certain risk-prone features such as an interest-only period of repayment (which lets you have lower payments temporarily but doesn’t actually reduce the amount that you owe), negative amortization (which can actually increase the amount that you owe despite your payments), and balloon payments (smaller payments over time that leave a larger “balloon” balance at the end of the repayment term).
Come from a lender that meets specific CFPB requirements and that assesses your ability to repay the loan before it is granted.
Unfortunately, loan terms longer than 30 years are also considered a risk-prone feature by the CFPB. This is due in part to the previous abuses of 40-year mortgages. Despite changes to lending practices, modern 40-year mortgages still can’t be qualified according to CFPB rules. Even if the lender (and the loan) meet all the other requirements, a 40-year mortgage will still be an unqualified loan because it exceeds the maximum allowable term for a mortgage loan.
Is an Unqualified Mortgage Bad?
Whether an unqualified mortgage is “bad” depends on the lender who issues your loan. Because unqualified loans do not meet CFPB qualification requirements, there’s obviously some inherent risk. But if you have a good mortgage lender and go into the loan well informed, the risk may be manageable.
The problem is that not all lenders who offer unqualified loans are good lenders. They may pressure you into choosing loan products that make them more money or may not make all options available to you so that they can make more money off of your loan. Some will mix the 40-year mortgage with other risks that would disqualify a loan, such as having an interest-only period during repayment or setting up a balloon payment at the end of your repayment period. Since the loan is already unqualified because of its term, there’s nothing stopping lenders from adding other risk factors to increase their profits.
Are 40-Year Mortgages Fixed-Rate or Adjustable-Rate Loans?
Technically, you should be able to find 40-year mortgages as either fixed-rate or adjustable-rate loan products. But realistically, you’re much more likely to see these loans as fixed-rate offerings because of the risk involved: adjustable rates are riskier than fixed rates because an upswing in interest increases the amount you owe. Forty-year mortgages are already risky enough because they don’t meet the criteria for a qualified loan.
That’s not to say that you won’t find 40-year adjustable-rate mortgages if you search for them. Given the length of time you’ll be repaying your loan and the overall amount of interest you’ll have to pay, though, there may not be much of an advantage in hunting down adjustable-rate loans. Interest rates are likely to shift significantly over the next 40 years, and it’s unlikely that the end result will average out to a much lower payment than what you’d get from a fixed-rate loan.
How Do 40-Year Mortgages Compare to Other Loans?
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% down payment, 4.63% interest)
As you can see, these three loans are all for the same amount and feature the same down payment. After five years, the amount of interest paid isn’t that significantly different—there’s less interest paid on the 15-year loan, of course, but that’s because of the shorter term resulting in larger payments (which in turn repay principal faster). But there is a much more significant difference in the amount of equity accumulated after that five years.
The equity gap becomes even wider after 10 years, even though the amount of interest paid stays about the same. Borrowers with a 40-year mortgage are paying a lot more interest for their loan and are building equity at a much slower rate. This is reflected in the slow loan-to-value (LTV) ratio shift compared to the other loans; by year 10, the 15-year mortgage has over $232,000 in equity and an LTV of just over 37%, while the 30-year mortgage has $102,000 in equity and an LTV of around 72%. The 40-year mortgage has built around $73,000 in equity and still holds an LTV of over 80%.
Can You Modify or Refinance a 40-Year Mortgage?
Loan modification can extend the repayment term of existing mortgages, sometimes by several years. In some cases, you may be offered a 40-year mortgage as a modification to a shorter-term loan as a way to lower payments and make them easier to manage. But this sort of modification is unlikely if you already have a 40-year mortgage.
You can still refinance a 40-year mortgage, though. In most cases, you should be able to refinance your mortgage into a shorter-term loan that features a faster LTV shift and reduces the overall amount you’re paying in interest. Your refinanced loan may even be a qualified loan, potentially giving you access to resources or loan insurance discounts that aren’t offered on unqualified loans.
Should I Get a 40-Year Mortgage?
Even though a 40-year mortgage is an unqualified loan, you can still find some lenders who are willing to offer these instruments. Remember, you’ll end up paying more for the loan over its lifetime than you would for a shorter-term loan, and you’ll build equity at a much slower rate. You will have a lower monthly payment, though how much lower will depend on your lender and the deals you might be able to find on a qualified 30-year mortgage.
Ultimately, there’s a lot you should consider before taking on a mortgage with a 40-year term. If you need to find the absolute lowest payment and don’t care that you’ll pay more over the life of the loan, it might be a viable option for you. If you’re looking for a good value on a loan, or don’t have a specific need for a 40-year repayment, then you’ll likely do much better with a qualified 30-year mortgage instead. Even if you do look at 40-year mortgages, you’ll likely be best served by refinancing into a more attractive loan package once you can afford it.