Buying a house is a life goal. But it can be a costly affair. A 40-year mortgage can help you buy your dream house with reduced monthly payments. You have a 40-year term to repay your mortgage loan.
However, a 40-year mortgage has a few drawbacks to consider. In this blog, we get into the details of a 40-year mortgage with benefits, drawbacks, and alternatives.
First, let’s see how it works step by step –
- Step 1: Loan Application: The borrower needs to apply for a 40-year mortgage through his mortgage lender. The borrower has to produce certain financial documents and personal information like bank account statements, employment history, etc for his loan evaluation.
- Step 2: Loan approval: After the scrutiny of the documents submitted by the borrower, the lender approves the loan. The lender would fix the interest rate and terms of the loan.
- Step 3: Acceptance of loan terms: The borrower needs to agree to the loan terms set by the lender. This would include the loan amount, interest rate, monthly payment, and repayment period.
- Step 4: Monthly payments: The borrower needs to make sure to do the monthly payments based on the agreed loan terms. These could be smaller payments as compared to a 30-year mortgage.
- Step 5: 40 years of repayment schedule: The borrower would keep paying his monthly payments for 40 years or till it’s paid in full whichever is earlier.
The Benefits Of 40-Year Mortgages
A 40-year mortgage may benefit the borrower in many ways including –
- Lower monthly payments: In this, the monthly payments are generally lower making it easy for the borrower to manage his funds.
- Improved cash flow: After the monthly mortgage payments, the borrower can invest the rest of the liquid funds.
- Better budgeting: This loan would allow the borrower to budget for the long-term goal like a retirement plan.
- Greater flexibility: A 40-year mortgage will let the borrowers pay an extra amount towards their principal amount & hence close the loan faster.
The Downsides Of 40-Year Mortgages
Before making any financial decision it’s best to weigh in the drawbacks as well –
- Higher interest rates: More the loan tenure, the higher will be the rate of interest. This would make the borrower pay more interest over the entire loan span.
- Lower equity: With lower monthly payments, it can take longer for a borrower to build equity in their home, which can make it harder to sell or refinance the home in the future.
- Longer time to pay off the loan: This will make the borrower keep paying the loan even after his retirement which could be a burden.
- Limited lender options: The borrowers may have limited lender options as not every lender allows this type of mortgage.
Alternatives To 40-Year Mortgages
Check out other options before making your final decision –
- 30-year fixed-rate mortgage: Here, the borrower will pay less interest comparatively but with slightly higher payments.
- 15-year fixed-rate mortgage: This will let the borrower pay a little higher monthly payment but will finish the mortgage sooner.
- Adjustable-rate mortgage (ARM): The borrower may consider ARM as it offers a fixed interest rate. These low-interest rates are typically charged for initial 4-5months
- Refinancing: The borrower can consider refinancing his current mortgage to a lower interest rate or a shorter loan term. This can reduce the monthly payments and save money on interest over the life of the loan.
30- Vs. 40-Year Mortgages
- Monthly payments: Because the term of the loan is longer, a 40-year mortgage typically offers lower monthly payments than a 30-year mortgage. However, the total amount of interest paid over the life of the loan will be higher with a 40-year mortgage.
- Interest rates: Generally, interest rates on 30-year mortgages are lower than 40-year mortgages. This means that borrowers may pay more in interest over the life of a 40-year mortgage, even with lower monthly payments.
- Loan term: A 30-year mortgage is a standard loan term and is more widely available from lenders. A 40-year mortgage is less common and may have more limited options available from lenders.
- Equity: Because a 40-year mortgage takes longer to pay off, it can take longer for the borrower to build equity in their home. This can make it more difficult to sell or refinance the home in the future.
- Total interest paid: A 40-year mortgage will generally result in a higher total amount of interest paid over the life of the loan, due to the longer term and potentially higher interest rate.
Ultimately, the choice between a 30-year and a 40-year loan will depend on a borrower’s individual financial situation, goals, and needs. It’s important to carefully consider the trade-offs of each option and work with a qualified mortgage professional to determine the best choice for your situation.
The Bottom Line
A 40-year mortgage may be a good option for many borrowers who want to manage their funds initially. Before considering this type of loan, understand the advantage and disadvantages. Or you can consult with your financial advisor who would guide you with the best option.
Frequently Asked Questions
Can you get a 40 year mortgage?
Yes. The lender can get you a 40-year mortgage after checking your personal and financial documents.
Who offers 40 year mortgage?
Not every lender offers a 40-year mortgage but big lenders like Wells Fargo, and Bank of America do offer this. These banks will ask you to produce a list of documents & after a thorough scrutiny they would decide on your consideration.