Many people don’t know that you can get a 40-year mortgage. Most lenders offer 15- or 30-year mortgages. But while 40-year mortgages can reduce your monthly mortgage payments, they come with high long-term costs that make them unsuitable for most buyers. However, there are situations where they make sense, especially if you’re struggling to make your current mortgage payments.
We’ll guide you through the costs, benefits, and drawbacks of 40-year mortgages so you can have a better idea of if there is a 40-year mortgage that’s right for you.
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Why are 40-year mortgages hard to find?
You might have noticed that many banks and credit lenders don’t actually offer 40-year mortgages. That’s because 40-year mortgages are considered non-qualified mortgages because they don’t adhere to requirements set by the Consumer Financial Protection Bureau (CFPB).[1] Plus, they’re considered non-conforming loans because they don’t follow Fannie Mae and Freddie Mac’s rules for conventional mortgages.[2]
These factors mean that 40-year mortgages aren’t usually backed by the government and they’re riskier for lenders. As a result, most banks and credit unions won’t offer them, and those that do have stricter requirements. To prequalify for a mortgage of 40 years, you should expect to have a higher credit score, bigger down payment, and pay higher interest rates.
Calculating the cost of a 40-year mortgage
The main advantage of a 40-year mortgage is that payments are spread out over a longer time period, which makes your individual monthly payments lower. For example, here’s how much you’d pay each month with a $450,000 mortgage:
| Loan term | Interest rate | Monthly payment |
|---|---|---|
| 30-year mortgage | 6.5% | $2,843 |
| 40-year mortgage | 6.75% | $2,667 |
| Difference | +0.25% | -$176 (6.2% less) |
As you can see, even with the slightly higher interest rates, you’d still pay 6.2% less per month with a 40-year mortgage than with a 30-year one. However, while those savings are attractive, they don’t tell the full story.
When calculating total interest paid over the entire term, the differences are stark:
| Loan term | Total interest paid |
|---|---|
| 30-year mortgage | $573,480 |
| 40-year mortgage | $830,080 |
| Extra cost for 40-year loan: | $256,600 |
With the 40-year mortgage, you’ll pay more than $256,000 in additional interest — over half of what your original loan amount was. Before deciding on a 40-year mortgage, make sure you understand what a mortgage is and how different terms and interest rates affect your total costs.
Building equity with a 40-year mortgage
Another drawback of a 40-year mortgage is that it will take you a lot longer to build equity in your home since your monthly payments are smaller. Especially early on when a higher share of those payments is going toward interest, you’ll have very limited equity.
For example, using our $450,000 loan example from above, after 10 years you’d have paid down $103,000 of the principal with the 30-year mortgage, but only $80,000 of the principal with the 40-year mortgage. In other words, you’d have 28% more equity after the first 10 years with a 30-year loan.
Building equity slower has real financial consequences. Without as much equity, you’ll have a harder time qualifying for new loans or refinancing. If property values fall, you may not even have enough equity in your home to make up the difference, which could leave you underwater on your mortgage.
Who can benefit from a 40-year mortgage?
Clearly 40-year mortgages have major drawbacks, which is why they’re not suitable for most buyers and homeowners. But there are a handful of situations where they might make sense for you.
Loan modification to avoid default
The most common use of a 40-year mortgage isn’t actually to buy a home, but rather as a modification to an existing home loan. If you’re experiencing financial hardship and you’re struggling to make your monthly mortgage payment, extending the term to 40 years can provide relief.
In fact, a loan modification even allows you to extend conforming loans to 40 years, something they’d usually be ineligible for. For example, an FHA loan can be extended to 40 years in order to reduce your risk of default and foreclosure.[3] To extend your loan, you’ll need to talk with your lender.
Borrowers who plan to refinance later
While it’s less common, some borrowers may choose a 40-year mortgage as a temporary measure before refinancing to a 15- or 30-year mortgage later on. This may be done because they have a non-traditional income, such as being self-employed, which can make it difficult to qualify for a standard mortgage.
Because 40-year mortgages are easier to qualify for if you’re self-employed, they can be a good option temporarily. Although, keep in mind that you’ll still need a good credit score and likely a large down payment.
After you’ve established a good track record of making payments on time — or your employment status has changed — you can refinance to a standard mortgage and take advantage of the lower interest rates. Be aware, however, that you’ll have to pay closing costs when refinancing.
Freeing up cash flow
Some borrowers also use 40-year mortgages to free up their monthly cash flow for other investments. Since your monthly mortgage payments are lower, you can use that additional cash for high-return investments.
However, for this strategy to work, you’d need to consistently make more from your investments than you’d be losing through the higher interest rate of your 40-year loan. Because maintaining a high return on investments is challenging, using a 40-year mortgage this way is risky and can easily backfire.
Purchasing in a high-cost area
In some high-cost areas, such as California and New York City, buying a home can be difficult even if you have a stable income and great credit. In these areas, 40-year mortgages are more common as they provide a way for buying property when there are limited affordable options.
While 40-year mortgages are a more viable option in these areas, the same risks remain, including higher interest rates. If possible, consider buying a house with a lower price rather than extending your loan term.
Alternatives to a 40-year mortgage
While the 40-year mortgage will reduce your monthly payments, it’s not a great choice for saving money overall. You can cut your mortgage costs by considering these alternative approaches.
- Make a larger down payment: The best way to reduce your monthly payments is by increasing your down payment. For example, on a $400,000 mortgage, putting down 20% instead of 10% will save you approximately $270 each month — well above what you’d save with a 40-year mortgage.
- Make extra payments: Making extra payments on a 30-year mortgage can reduce your total interest paid and help you pay off your loan sooner. For example, adding $200 to your monthly payments can save you over $155,000 in interest and help you pay off your loan 8.5 years earlier.
- Make biweekly payments: Most lenders allow you to make biweekly payments instead of monthly ones. Doing so essentially means you’ll be making extra payments, which will help you reduce your loan term and total interest paid.
Should you get a 40-year mortgage?
For most home buyers, a 40-year mortgage isn’t a good option. While your monthly mortgage payments will be a bit lower, you’ll pay far more in interest over time and you’ll struggle to build equity.
But if you’re struggling to make your current mortgage payments, then talking to your lender about extending your loan term to 40 years may be a good idea. And in some cases, a 40-year mortgage can be a useful tool for buying a home when no other options are available.
But make sure you understand all of your options before committing to a riskier mortgage product. Having the right team on your side will help you avoid making costly decisions and with uncovering the options that are best for you. Talk to a licensed real estate professional who can connect you to a lender or realtor.