Last Updated on May 14, 2023 by Eric Jeanette
40 Year Mortgage
A great way to reduce monthly mortgage payments is to consider alternative mortgage programs. Lenders who offer 40 year mortgage options can help reduce the principal portion of your mortgage by stretching it out over 40 years versus the traditional 30 years.
What is a 40 Year Mortgage?
A 40 year mortgage is a mortgage that is designed to provide for a lower monthly payment for the borrower while having the long term stability of a fixed rate.
The principal payments are spread out over 40 years versus the traditional 30 years which is how the monthly payment gets reduced.
Pros and Cons of a 40 year Mortgage
A 40 year mortgage is an attractive mortgage program, but it may not be for everyone. Below are some of the pros and cons of a 40 year mortgage to help you decide whether this is the right mortgage for you.
Pros of a 40 Year Mortgage
Lower monthly payments – When you stretch the principal payments over 40 years, your monthly payments will be reduced. This is the primary reason why most people choose a 40 year mortgage.
Fixed interest rate for the life of the loan – Unlike an adjustable mortgage which also helps to reduce payments, a 40 year mortgage typically has a fixed interest rate for the entire term of the loan. This helps bring peace of mind to those who would otherwise be concerned about an increase in the rate which is possible with an adjustable mortgage.
Helps to qualify for a higher loan amount – The reduced mortgage payment also means you are lowering the DTI which in turn means you can qualify for a larger loan amount. Having this option could help you to purchase a home that may be out of your reach with a 30 year fixed mortgage.
Cons of a 40 Year Mortgage
You pay off the loan slower – If your goal is to pay down the mortgage quickly, then a 40 year mortgage may not be what you need. It takes 33% longer to pay off the balance with a 40 year mortgage. You can always send extra mortgage payments each month but that would defeat the purpose of applying for a 40 year mortgage.
Interest rates are higher – The trade off when going to a 40 year mortgage is the interest rate is slightly higher than a 30 year. Despite having a higher rate, you should still see a lower monthly payment.
Very few lenders offer a 40 year mortgage option – One of the challenges is finding a lender who offers a 40 year mortgage option. It may be something that a creative portfolio lender will offer. Your standard bank on the corner that offers conventional mortgages likely does not have a 40 year mortgage option.
Not available as an FHA loan – FHA loans are extremely popular with first time home buyers because they allow for lower credit scores and a small down payment. However, the program is not offered in a 40 year term.
Larger Down Payment – The smaller down payment mortgage options such as USDA, VA, and FHA do not offer 40 year mortgage terms. Therefore, you will be looking at an alternative 40 year mortgage option where the down payment will likely be higher.
Is a 40 Year Mortgage a Good Idea?
A 40 year mortgage is a good idea if you must have a lower monthly payment than what you can get with a 30 year fixed. It may also be a good idea of you are trying to qualify for a larger loan amount.
A 40 year mortgage is not a good idea if the interest rate is much higher than the 30 year. In this scenario, the payment difference would be minimal and it would make more sense to go with the 30 year.
40 Year Mortgage Rates
The 40 year mortgage rates are typically higher than a 30 year fixed rate mortgage. The rate that is offered is always determined by your credit scores, down payment and ultimately the lender. You should expect the rate for a 40 year mortgage to be at least .25% higher than a 30 year fixed.
The slightly higher interest rate is more than offset by the savings from the 40 year amortization schedule. The decision to go with a 40 year mortgage is purely based upon the monthly payment savings.
If you would like to speak to someone about getting a quote for a 40 year mortgage, then complete this short quote form.
40 Year Mortgage Calculator
Use this 40 year mortgage calculator to see how much lower your payment will be with a 40 year mortgage. With this calculator, the interest rate will be the same as the 30 year. What the lender may offer you is a slightly higher rate for the 40 year mortgage option.
40 Year Mortgage Calculator
How to Get a 40 Year Mortgage
To find a 40 year mortgage, you first need to find a lender who offers the program. Most big banks that have a branch in your home town do not offer a 40 year option which means you are looking for an alternative lender.
To qualify for a 40 year mortgage, you will go through the same steps just like a conventional or FHA loan. You will need to provide pay stubs, bank statements, W2s and tax returns. The only difference is how the lender calculates your debt to income ratio using the smaller payment scenario.
In some instances, the lender who offers the 40 year mortgage pay not require PMI when your down payment is below 20%. This will provide you with a greater monthly payment savings versus other loan options with a small down payment.
40 Year Mortgage Lenders
These are just a few types of mortgage lenders that may offer a 40 year mortgage option. Let us help you to find the best 40 year mortgage lender in our network by completing this short form. We will take your location, down payment, and other unique aspects of your scenario to determine the best lender match.
Mortgage Brokers – Mortgage brokers will have many wholesale lender partners that offer a 40 year mortgage option. The value of a broker is having that ability to find the best solution for you especially when some of those are difficult for a consumer to find on their own. Read more about mortgage brokers here.
Portfolio Lenders – A portfolio lender will originate the loan and will keep that loan within their own portfolio. Other lenders will sell the loan soon after closing. Portfolio lenders are able to create their own mortgage guidelines which often times are more flexible because they are not held to the standards of others.
Wholesale Lenders – A wholesale lender is one that works through a broker network. In some instances that wholesale lender may also work direct with consumers, but usually that is not the case. This means the best way to access a wholesale lender is to work through a broker. Wholesale lenders can also be portfolio lenders, but they usually sell the loans to private investors soon after closing.
When Did 40 Year Mortgages Start?
The first 40 year mortgage was offered decades ago by portfolio lenders. There is no exact date on record because they were initially not supported by HUD or Fannie Mae.
In June 2005, Fannie Mae initially approved the use of a 40 year fixed and hybrid arm mortgage with terms of 3 year, 5 year and 10 year ARMs. However, today you cannot find Fannie guidelines that indicate that a 40 year mortgage is offered.
In the Spring of 2023, HUD approved an FHA loan modification to a 40 year mortgage payment for those who are struggling to make their payments. At this time, there is no discussion of an FHA 40 year mortgage to purchase or refinance a home.