Explore your mortgage options
Traditionally, most mortgages are either 15-year or 30-year loans. And because purchasing a home can get expensive, many aspiring home buyers wonder if it’s possible to get a longer mortgage. Typically, the longer a loan’s repayment term, the lower your monthly payments. Enter the 40-year mortgage.
Before applying for this type of loan, it’s important to learn more about what a 40-year mortgage is, how it works and how to find one. You’ll also want to know why it may not be in your best interest to commit to a 40-year mortgage.
Can You Get a 40-Year Mortgage?
The short answer is yes – but they can be hard to find. Most lenders don’t offer 40-year term home loans, but if you look hard enough, you’ll find lenders that do.
The repayment period for a 40-year mortgage lasts for 40 years (hence the name). And 40-year mortgages operate in largely the same way as 30-year mortgages. You must meet a lender’s criteria to qualify for the loan. This may include meeting a maximum debt-to-income (DTI) ratio and minimum credit score and down payment requirements.
Once the loan is issued, you repay the lender by making monthly payments over the loan’s term. You pay back the principal balance plus interest. And the interest rate you qualify for will have a big impact on the size of your monthly payments.
As you pay off the loan, your equity in the home will increase. How quickly or slowly it takes to build equity will depend on your amortization schedule. If you selected a longer mortgage term, it will likely take you longer to build equity. And depending on the terms of the loan, you may only be able to make interest-only payments with a 40-year mortgage at first.
Why are 40-year mortgages harder to find?
40-year mortgages are harder to find because they aren’t “qualified mortgages.”
Qualified mortgages are loans that meet criteria established by the U.S. government. The criteria exist to protect consumers by ensuring lenders only issue mortgages borrowers can likely afford to repay.
The criteria include[1]:
- Ability-to-repay rule: A lender must make a good-faith effort to determine whether a borrower can repay a loan.
- Loan term limits: Loan terms can’t be longer than 30 years.
- Prohibited risky loan features: Certain features aren’t allowed to be part of a loan, including interest-only payments and balloon payments.
It’s safer for lenders to issue qualified mortgages than nonqualified mortgages. They’re afforded more legal protections for these loans and more financial options.
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Pros and Cons of a 40-Year Mortgage
To help you decide whether a 40-year mortgage is a loan you should consider, we’ve put together some pros and cons.
Pros of a 40-Year Mortgage
Lower monthly payments
Lower monthly payments are the primary reason to get a 40-year mortgage. The longer you stretch a loan’s term, the lower your monthly payments will be. The lower payment can help you comfortably afford a home.
Increased borrowing limit
Because the monthly mortgage payments are lower, borrowers may be able to borrow more money for a 40-year mortgage than for a shorter-term loan. The home buyer’s increased purchasing power may help them afford a bigger home or a home in a better neighborhood.
Budget flexibility
Lowering your monthly payment can provide greater flexibility in your budget. You can use the additional disposable income to pursue other financial goals beyond homeownership.
Cons of a 40-Year Mortgage
Pay more interest
Due to its lengthy loan term, borrowers pay significantly more in interest over the life of the loan, raising the loan’s overall cost. Borrowers may even pay more in interest than the original loan amount they borrowed.
Higher interest rates
In addition to paying more in interest because of the loan’s repayment schedule, you’ll likely pay higher interest rates than you would for a shorter-term loan. The higher rate can eat into the savings from your lower monthly payments.
Build equity slower
Another downside of a longer loan term is the drawn out amortization schedule. Most of your payments go toward interest in the early years of the loan. And in some cases, you may only be able to make interest-only payments.
Building equity in your home will take significantly longer than it would with a shorter loan term. And you may be at greater risk of going underwater on your mortgage if the housing market takes a dive.
No qualified mortgage protections
Because a 40-year mortgage doesn’t meet government criteria, you may be exposed to riskier loan features, such as:
- Negative amortization: Your loan’s principal balance increases even as you make payments.
- Balloon payments: You must make a larger-than-average, one-time payment at the end of a loan’s term.
Where To Find a 40-Year Mortgage
These longer-term mortgages are harder to find, but the process of finding a lender that offers a 40-year mortgage works a lot like shopping around for lenders that offer traditional mortgages. If you can find them, talk to multiple lenders. Ask about their loan origination fees, eligibility requirements and interest rates.
You may be able to get a 40-year mortgage from the following types of lenders:
- Online lenders
- Banks
- Credit unions
- Mortgage brokers
It never hurts to ask. And even if the lenders don’t offer 40-year mortgages, they may have alternative loan options that can jump-start the home buying process.
Refinancing
Buying a home isn’t the only way to get a 40-year mortgage.
In some cases, you can refinance your mortgage into a 40-year loan. You can’t purchase a home with a Federal Housing Administration (FHA) loan with a 40-year term, but you may be eligible to switch to a 40-year mortgage to lengthen your loan term and lower your monthly payments.[2]
If you want to refinance to a 40-year mortgage and your current lender doesn’t offer that option, shop around for another lender to refinance your loan and reduce your monthly payments.
Alternatives to a 40-Year Mortgage
Considering the risks associated with 40-year mortgages, it’s recommend to use alternative loans or strategies to finance your home purchase, especially for first-time home buyers.
Here are some good places to start:
Adjustable-rate mortgage
With adjustable-rate mortgages (ARMs), borrowers pay an initial interest rate that periodically readjusts over the life of the loan. You start with a lower interest rate for the first few years of the loan, which helps keep your initial monthly payments low.
Once the fixed-rate period ends, the interest rate is subject to change and can increase. Fortunately, the increases are limited by interest rate caps, but your mortgage payments will increase.
USDA loan
To qualify for a U.S. Department of Agriculture (UDSA) loan, you must live in a qualified rural area. One of the biggest perks of a USDA loan is the potential to purchase a home with zero down payment required.
The home must be your primary residence, and you must meet income and credit score requirements. If you’re ready to leave the city behind, USDA loans offer great opportunities to borrowers.
FHA loan
FHA loans are designed to help first-time home buyers or buyers with credit issues.
If your credit score is above 500, you should be able to qualify for an FHA loan – though many lenders may require a minimum score of 580. If your credit score is 580 or higher, you can potentially make a minimum down payment that’s 3.5% of a home’s purchase price[3] depending on other factors.
Save up for a bigger down payment
If you can’t qualify for a conventional loan or one of the alternatives we’ve mentioned, the best strategy may be to put your home purchase on pause and save up as much as you can for a down payment.
The larger your down payment is, the less money you need to borrow from a lender. It can improve your chances of getting approved for a mortgage and save you money on interest over the life of the loan.
40-Year Mortgage FAQs
You can’t apply for a 40-year mortgage with the FHA to purchase a home. But you can refinance your FHA loan to extend its repayment period to 40 years if you meet the loan’s financial hardship requirements.
It depends on how your loan is structured. Theoretically, you can. But paying off some or all of your mortgage ahead of schedule may trigger a prepayment penalty. However, not all mortgages have prepayment penalties. Check your mortgage agreement to see if it has a prepayment penalty clause.
Yes, you should be able to refinance your mortgage into a shorter loan term. Make sure you can handle the expense of paying closing costs again and can afford the likely increase in your monthly mortgage payment from shortening your repayment term.
Final Thoughts on 40-Year Mortgages
The prospect of low, low monthly payments can make 40-year mortgages seem too good to pass up. But once you’ve gotten past the low payments and do the math, you’ll likely see that you’ll end up paying significantly more in interest over the life of the loan, and its higher interest rates will cut into your savings.
Look into alternative loans or strategies before committing to a riskier loan with a 4 decade-long loan term.
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The Short Version
- A 40-year mortgage typically lowers your monthly mortgage payment because it extends the loan over a longer period of time, but you pay more in interest over the life of the loan
- 40-year mortgages don’t meet government criteria for qualified loans, which can expose borrowers to riskier practices like interest-only payments and balloon payments
- Consider USDA loans, FHA loans and adjustable-rate mortgages (ARMs) as alternatives to 40-year mortgages
Consumer Financial Protection Bureau. “What Is a Qualified Mortgage?” Retrieved July 2023 from https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/
U.S. Department of Housing and Urban Development. “FEDERAL HOUSING ADMINISTRATION ADDS 40-YEAR MORTGAGE MODIFICATION WITH PARTIAL CLAIM TO HOME RETENTION OPTIONS FOR STRUGGLING BORROWERS.” Retrieved July 2023 from https://www.hud.gov/press/press_releases_media_advisories/hud_no_22_070
Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved July 2023 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf
