Traditionally, lending institutions have offered mortgage loans with a 30-year fixed term. However, we’ve also seen options such as a 15-year fixed term enter the market to give people the opportunity to pay off their loans faster and build home equity.
A more recent trend is seeking to extend the life of a loan by offering a 40-year mortgage loan. A 40-year mortgage loan could be the right option for many but has its advantages and disadvantages. We’ll look at everything you need to know about 40-year loans, including how they work and what factors to look at when deciding to obtain a 40-year loan.
What is a 40-Year Mortgage?
A 40-year mortgage is a qualified mortgage that lending institutions may offer homeowners. Like other types of mortgage loans, there are a variety of options available with a 40-year loan period. For example, there are fixed-rate 40-year mortgage loan options and adjustable-rate mortgage options.
For example, there might be interest-only periods for a certain timeframe at the beginning of the loan before switching to payments of principal and interest for the remainder of the term. With a 40-year fixed-rate mortgage, the period of the loan is longer than 30 years, but the interest rate remains the same over time. With an adjustable-rate 40-year mortgage, the interest rates are variable. So you may pay lower interest rates initially at a fixed rate, and then the interest rate resets, so you may pay a higher interest rate over the life of the loan.
Some lenders may offer a 40-year mortgage as an interest-only loan. An interest-only loan usually has interest-only periods for the first 10 years, after which it basically becomes a 30-year fixed mortgage. However, there are risks associated with an interest-only loan, especially if you’re unable to make payment after the interest periods end.
How a 40-Year Mortgage Works
If you’re familiar with a 15-year mortgage loan and a 30-year loan, a 40-year mortgage is in a similar space. Traditionally, mortgage loans range between 8-30 years at the most.
Taking a 40-year mortgage loan enables you to pay the loan off over 40 years, or 480 months. Like other mortgage options, a 40-year mortgage loan assumes that you make scheduled minimum payments and don’t pay any extra payments over the life of the loan. A 40-year mortgage isn’t a very common option when seeking mortgage loans, but with rising mortgage rates, it could be an option for homeowners who want a lower monthly payment.
Advantages of a 40-Year Mortgage
So now that there is a better understanding of 40-year mortgage rates, what are the advantages of obtaining this kind of home loan? The main draw of a 40-year mortgage is that it is spread over a longer period of time, enabling you to make a potentially lower monthly payment for a more extended period.
For homeowners that are struggling to make payments, modifying the loan terms to 40 years could help with getting back on track while working to save more. With a 40-year mortgage, there are more opportunities for short-term savings, which can be immensely beneficial if that is a financial priority.
Disadvantages of a 40-Year Mortgage
The main benefit of a 40-year mortgage could also prove to be a disadvantage for many in the long term. Although the monthly payments are lower, the life of the loan is a lot longer — which gives plenty of time for interest to accrue. So by taking on a 40-year mortgage, the tradeoff is that you are taking on more interest over the life of the loan, which causes the loan to be more expensive at the end of the day.
Depending on the lender, a 40-year home loan may also come with a higher interest rate, meaning the loan could end up costing you more in the long term. The amount you are willing to pay for your down payment could also impact the interest rate offered to you.
Lastly, you’ll need to consider what kind of loan type will help you build home equity faster. For example, a 40-year mortgage loan will likely mean that more of your payments go towards interest rather than the principal, which means equity builds slowly.
30-Year vs. 40-Year Mortgage Differences
Deciding between a 30-year and 40-year home loan will largely depend on your financial position and what you can afford in the short and long term. Generally, the benefits of a 30-year home loan are that you build equity faster as you pay off the loan, which means higher monthly payments. On the other hand, with a 40-year mortgage, you have some leeway to make smaller mortgage payments while extending the life of the loan — but the drawback is that you have a longer window to pay and, ultimately, more interest.
A 40-year mortgage could be an option if you want to get into a home, but the payment is too high on a 30-year loan, you are struggling with finances, or you have recently experienced some kind of setback. It can be a measure to keep your home while making your mortgage a bit more affordable as you get back on your feet.
But when it comes to which one is the better option — that will very much depend on your circumstances. The best way to make that decision is to compare different elements of what lenders are offering against your current and future financial position.
Before opting for any kind of loan, consider your short-term and long-term financial future. What kind of payment can you afford now, and what kind of changes do you foresee that could potentially impact your ability to make payments? Having a realistic figure in mind as you evaluate loan options is crucial.
A 30-year term may have a higher monthly payment, but you’ll pay off the loan faster without accruing as much interest. Even more so if you end up going for a 15-year mortgage.
Ideally, the mortgage option shouldn’t be considered in isolation to make the decision. Instead, think about your loan in conjunction with other financial goals such as retirement, future medical expenses, vehicles, and other purchases that could potentially impact your ability to pay per month.
This goes back to the earlier point about going through a few different financial scenarios before opting for this kind of home loan to ensure that it’s the right choice. As you’re able to explore the consequences of each type of home loan in the short term and long term, you’ll be better placed to decide whether a 30-year or 40-year mortgage is the right option for you.