Of course, we all want to pay off the mortgage quickly and become total real estate owners! But, in reality, things are more complex. For example, a 40-year mortgage can help alleviate the burden on the family budget. But, of course, it has several significant disadvantages. Let’s see – is it advisable to pay longer? Is a 40-year mortgage really a good idea?
What is a 40-year mortgage?
Most mortgages have terms of 15 or 30 years. But, if you want to reduce your monthly payment, there is a 40-year mortgage option.
- On the one hand, a 40-year mortgage helps reduce payments and make credit more affordable.
- On the other hand, there are many restrictions — for example, only a few lenders offer this type of loan. But, it may become a modification option for a mortgage. For example, if you need help to keep up with payments.
Basically, a 40-year mortgage is just a mortgage with an increased payment. In this case, 480 months instead of the generally accepted 15-30 years. Today, many borrowers have yet to hear of 40-year mortgages, but this type of loan was available during subprime mortgages. In 2008, subprime mortgages became part of the financial crisis, the effects of which are still being felt today.
How does a 40-year mortgage work?
A 40-year mortgage is a modification of a 30-year mortgage for debtors who are having trouble making payments. The payment period increases and the monthly payments decrease – therefore, this solution is suitable for debtors who cannot cope with a mortgage for a shorter period.
- FHA proposes a 40-year mortgage modification
- Also, borrowers with loans from Fannie Mae and Freddie Mac can get this modification.
- Some lenders offer 40-year mortgages for new home purchases — fixed or adjustable rates.
But not everything is as rosy as it might seem. Mortgage for 40 years is quite risky and unpredictable. For example, this loan may have a period when you pay only interest — at the beginning of the loan. Sounds good? True, then you may face a sharp increase in payments.
Also, 40-year mortgages are characterized by balloon payments, meaning you must make a lump sum payment after low payments for most of the loan term.
Mortgage rates for 40 years
Given the loan’s long-term, mortgage rates may be lower if you make a loan modification. But do not expect low rates from a new loan for 40 years – compared to a mortgage for 15 or 30 years.
The terms, including the interest rate, may vary when you change your loan.
But you still run the risk of paying more interest over the life of the loan simply because of the length of the loan.
A simple logic works here — the longer you pay, the higher the risk of overpaying the lender because the rate will be higher.
A 30-Year Mortgage vs. a 40-Year Mortgage
Let’s remember one crucial point. On a 40-year mortgage, you pay less each month, but on a 30-year mortgage, you pay less over the life of the loan. 40 years = cheap monthly payments, but many extra payments are due to high rates.
Pros and Cons of 40-Year Mortgages
A mortgage for 40 years is not a universal solution, and it is only suitable for some borrowers. Therefore, once again, weigh the pros and cons.
- You are reducing monthly payments. If you can’t pay your current mortgage, try extending your loan term and easing the pressure on your budget.
- An opportunity to save a little due to the interest-only option. For the first few years, you may be allowed to pay only interest, not principal, on the loan. But, it is better to be prepared in advance for the fact that payments will someday increase.
- The total value of real estate increases. You will overpay interest due to an extended credit period. Also, your rate is likely to be higher.
- Your home equity grows more slowly because you take longer to repay your loan.
- Finding a mortgage for 40 years is a real challenge; not all lenders offer such options.
- Most lenders are reluctant to offer a 40-year mortgage as a loan modification. Likely, this option will only be available to you when you purchase a property.
Is it possible to refinance a mortgage for 40 years?
You can refinance a mortgage for 30 years after 10 years of loan repayment – thus creating a mortgage for 40 years. But, of course, this is a difficult path.
Is a 40-year mortgage even a good idea?
Most experts are inclined to believe that there are more reliable options than a 40-year mortgage. But, if you are on the verge of losing your home, any means will be reasonable!
Borrowers think about something other than a 40-year mortgage as their primary and most profitable option. Usually, this is a forced decision that occurs due to financial difficulties or credit problems. Modifying the mortgage for 40 years gives you lower payments but higher rates, fines, and balloon payments.
If you want to save some money, choosing a 40-year mortgage is not worth it. Together with it, you take on significant financial obligations and risk driving yourself into another unprofitable loan.
What are the alternatives?
Choose a 40-year mortgage only if you have no other options left. And believe me. There are a lot of them. Here are a few options for borrowers who would like to save on mortgage payments:
- Mortgage for 30 years for a house with a low price.
- Loans from the FHA, USDA, or Veterans Affairs.
- Refinancing a 30-year mortgage in 10 years.
- Opportunity to save money with cheap insurance or discount points.
- Discount points are fees borrowers pay to lower the interest rate on their mortgages. One point = 0.25% rate cut. However, this setting may vary.
- The more points you buy, the more you save on your monthly payment. For example, to save $100 a month, you would need to make 3-4 discount payments.
A 40-year mortgage may be an option for struggling debtors who want to modify their credit. But, in the end, they still risk overpaying.
Many mortgage problems can be avoided by choosing an affordable program before buying a home. At LBC Mortgage, we will help you evaluate your financial situation, credit score, and individual wishes to find the best financing. Sign up for a consultation and start your journey to buying your dream home!