Global Courant
The offer of a lower monthly mortgage payment would entice any homeowner, which is exactly what a 40-year mortgage promises. By adding an extra decade to the standard 30-year mortgage, this loan form leads to lower monthly costs because you have more time to pay off the loan. But the amount of interest you pay over the life of the loan makes a 40-year mortgage a poor choice unless you otherwise risk defaulting on your existing mortgage.
If you’ve heard about a 40-year mortgage and are wondering if it can help you pay for a house, here’s what you should look for first.
Why most homeowners should avoid a 40-year mortgage
For borrowers looking to buy a home, a 40-year loan isn’t a good option because the savings don’t always outweigh the risks. “Frankly, I can’t imagine a situation where I would advise someone to do that when making a purchase,” says Elizabeth Rosea certified mortgage planner and lender with over 26 years of experience in the mortgage industry.
Let’s use a $350,000 home purchase with a 20% down payment ($70,000) as an example of why the lower monthly payment isn’t worth taking on this type of loan.
In that scenario, the buyer needs a $280,000 mortgage. For a 30-year loan at 6.85%, the total interest the borrower pays over the life of the loan would be $380,501. That number jumps more than $174,000 to $555,204 with a 40-year loan at 7%. The 40-year loan has a smaller monthly payment and would save the borrower $95 per month, but you pay nearly $175,000 more in interest.
With a 40-year loan, you also build up capital in your home much more slowly. Using the numbers from the example above, the remaining balance on the 30-year loan would be just under $240,000 after regular payments over 10 years. With the 40-year loan, the borrower would have a balance of more than $261,000 after 10 years.
Subscribe to the CNBC Select Newsletter!
Money is important, so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money delivered straight to your inbox. Register here.
Alternatives to a 40-year loan
No one wants to pay a higher monthly mortgage payment than they have to, and getting a good deal from a lender you trust is crucial to keeping those payments manageable. That’s why you always have to talk to different lenders when buying a mortgage before taking out a loan. Some of the best first-time home buyer lenders according to CNBC Select include PCC Bankwhich offers a wide range of loans that can meet almost any need, and Ally Bankthat does not charge lender fees.
PCC Bank
Annual Percentage (APR)
Request online for personalized rates; fixed and adjustable rate mortgages included
Loan types
Conventional Loans, FHA Loans, VA Loans, USDA Loans, Jumbo Loans, HELOCs, Community Loans, and Medical Professional Loans
Conditions
Need credit
Minimum deposit
0% if you move forward with a USDA loan
Ally Bank Mortgage
Annual Percentage (APR)
Request online for personalized rates; fixed and adjustable rate mortgages included
Loan types
Conventional loans, HomeReady loan and Jumbo loans
Conditions
Need credit
Minimum deposit
3% if you continue with a HomeReady loan
Is there a reason to get a 40 year loan?
While it’s hard to imagine a scenario where you’d want a 40-year loan to buy a new home, the lower monthly payments on this type of loan can help people who are having trouble paying off their existing mortgages. .
For example, the Federal Housing Administration added a option for 40-year FHA loans in May 2023, but it is only available in specific circumstances. A borrower can only get this type of mortgage through a loan adjustment program. Homeowners with an FHA loan who are in financial trouble and can’t afford their current mortgage payment may be able to lower their monthly payment by extending the term of their loan to 40 years. This change loan type may also be an option if you have a conventional loan, a type of loan that is not backed by the government.
Contact your loan manager to see if you qualify for a loan modification. “The sooner you seek help, the easier it is to get help,” says Rose. Your loan manager (the company you send your monthly payments to) can advise you on how to proceed and what options are available for your situation.
Why 40-year loans are hard to find
Very few lenders offer this type of loan, primarily because they don’t meet the Consumer Financial Protection Bureau’s (CFPB) guidelines for qualified loans. These rules prohibit riskier types of loans, including loans with a repayment term of more than 30 years.
Since 40-year loans do not meet CFPB guidelines, they cannot be backed by the government (unlike VA loans, FHA loans, USDA loans) and these loans cannot be sold by the lender to Fannie Mae or Freddy Mac. This makes 40-year mortgages riskier for lenders and potentially more expensive for borrowers.
It boils down
Homeowners have many options when it comes to buying a house, including taking out a mortgage with a term of 40 years. However, few lenders offer this type of loan. And while a 40-year loan has a smaller installment, it can cost more and pay off the loan much more slowly. For these reasons, the disadvantages of a 40-year loan may outweigh the advantages.
However, in certain situations, a borrower can change their existing loan to a 40-year mortgage. If these types of modifications can help a homeowner who is having financial problems keep their home, then it could make sense.
Stay tuned for CNBC Select’s in-depth coverage of credit cards, banking and money, and continue to follow us TikTok, Facebook, Instagram And Twitter to stay informed.
Note to editors: Opinions, analysis, reviews or recommendations contained in this article are solely those of the editors of Select and have not been reviewed, endorsed or otherwise endorsed by any third party.
