What is a 40-year mortgage?
A 40-year mortgage is a type of home loan that allows you to pay back the principal of your mortgage over a 40-year term. It is the brainchild of the Housing and Urban Development Department (HUD). It also falls under the Federal Housing Administration’s initiatives to help people still struggling in the wake of the COVID-19 pandemic.
Just like other mortgages, you can negotiate for a fixed-rate or an adjustable rate (ARM) 40-year mortgage.
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Can you get a 40-year mortgage?
In order to see if you qualify for a 40-year mortgage, contact your bank or mortgage lender . However, since 40-year mortgages don’t abide by the conventional rules of home loans, lenders have some wiggle room when it comes to determining what requirements you will need to have. This includes criteria such as your credit score and your debt-to-income (DTI) ratio.
How does a 40-year home loan work?
A 40-year loan lowers your monthly payments by spreading out your mortgage principal over a repayment term of 40 years (rather than 15 or 30). Not all lenders offer this option.
Because you will, over time, be paying significantly more interest on a 40-year mortgage than on 15- or 30-year mortgages, they are considered much riskier for both the borrower and the lender. But it does ease financial constraints in the short term.
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Which lenders offer a 40-year mortgage?
The greenlighting of 40-year mortgages has been most visible at the government level.
The FHA has joined the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) in offering 40-year mortgages.
The United States’ Department of Agriculture (USDA) also offers a 40-year mortgage term as a COVID-relief program.
A notable exception to “who is offering 40-year mortgages” is the Department of Veterans Affairs: currently, the maximum allowable term for a VA mortgage is 30 years and 32 days.
Beyond the FHA, USDA and federal mortgage lenders, research each mortgage company individually to find out whether they offer 40-year mortgages.
More: FHA loan requirements explained
30-year vs. 40-year mortgages
According to Freddie Mac, 90% of U.S. homebuyers choose a 30-year fixed-term mortgage because of its affordability and flexibility.
In terms or pros and cons, a 30-year and 40-year fixed mortgage are very similar.
Both are celebrated for having lower monthly payments than their counterparts, but they also come with higher overall interest rates. You can also end up paying more in property taxes over your loan term.
If you lock in a fixed rate, you’ll get that interest rate for the entire lifespan of your loan.
Thirty-year mortgages, due to their popularity with the average American homeowner, are offered pretty much by every mortgage lender in the country. Forty-year mortgages, on the other hand, are less common.
Advantages of a 40-year mortgage
The three major advantages of a 40-year mortgage are:
- Lower monthly payments, because the same mortgage amount is spread out over a term that’s 10 years longer
- Increased buying power: Due to the 40-year-mortgages’ longer terms and lower monthly payments, you may be able to negotiate for a more expensive house than you would otherwise
- Higher flexibility in regards to interest periods
However, higher flexibility has a hidden catch. Since there is a a period of time where you’ll only be making interest payments on your mortgage, this will lead to you paying down less on your principal. This won’t help you increase your house equity(the difference between what your house is worth and the amount you owe on your mortgage). There may also be a balloon payment —a much larger amount — due at the end.
Disadvantages of a 40-year mortgage
Some disadvantages of a 40-year mortgage are:
- Higher interest rates
- Longer period of time to build equity
- Higher total cost (because you have longer to pay it off, and there are no caps on closing fees)
- Harder to find. Due to the risk to the lender, not every bank or private mortgage lender will offer them
Is it possible to refinance a 40-year mortgage?
It may be too early to say for sure because HUD just approved the extension of 40-year mortgages in the beginning of May this year.
But if you have a 40-year mortgage and realize over the next few years that you need to refinance(get a new mortgage), it might theoretically be possible to do so.
However, there are a few things you might want to consider first.
First, refinancing your 40-year-mortgage is at the discretion of your lender, and as it’s not a qualified mortgage, if you’re denied you don’t have much recourse.
Second, the 40-year mortgage is a refinancing option, meant to address the financial hardships of people already contracted to 15- or 30-year mortgages who needed a break in their monthly payments. If you’re refinancing a 40-year mortgage, you’re likely trying to refinance your second loan.
If you need your 40-year mortgage refinanced to free up cash for other things, it is recommended that you go and speak with your lender, as soon as possible.
Is a 40-year mortgage a good idea?
The short answer is that a 40-year mortgage is sometimes a good idea. According to CNN, the U.S. has a housing shortfall to the tune of 6.5 million homes.
The shortfall has contributed to the increase in monthly rent and mortgage prices, and a 40-year mortgage is part of the government’s solution.
The idea is, by extending the term of their mortgage, people will have smaller monthly mortgage payments, which will help them afford other necessities.
Can you refinance to a 40-year mortgage?
The short answer is maybe. Since a 40-year mortgage is geared towards people already in danger of losing their homes, and refinancing helps to liquidate some of your home’s equity, lenders might think refinancing a 40-year mortgage is compounding a risk on top of a risk.
It may be worthwhile at this point to talk to your mortgage lender in person and discuss all the options you have.
Are there any risks of a 40-year mortgage?
Yes, there are risks to a 40-year mortgage.
Because 40-year mortgages aren’t common yet, their rates and fees aren’t standardized across the country.
Because they are considered riskier than either 15-year or 30-year fixed-rate mortgages, lenders also aren’t as enthusiastic about them.
They are also considered non-QM (not qualified) loans under the Consumer Financial Protection Bureau, because they allow interest-only periods (where you just pay down the interest and not the principal); negative amortization (where the amount of the principal is allowed to increase over time) and balloon payments.
What would be my monthly payment on a 40-year mortgage?
For this example, say you earn $4,000 in take-home pay, have monthly liabilities (debts of a recurring nature) that cost $485 and monthly house expenses that are $185 of your total budget. These are things lenders will look at when setting your rate.
If you lock in a 40-year fixed-rate mortgage at 6%, your monthly loan payment would be $990.00.
If you want to see what the mortgage payment would be on your dream home, plug in the numbers on Moneywise’s mortgage affordability calculator and get busy saving.
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