There has been much discussion about 40-year mortgages over the years, and why not? Extending the term of a mortgage lowers the monthly payment, making homes more affordable.
But as it turns out, lenders have been reluctant to roll out mortgages with 40-year terms. For that reason, 40-year mortgages are quite rare.
However, the federal government is rolling out a 40-year mortgage modification program for distressed homeowners, so it’s time for a deep dive into this elusive loan type.
What is a 40-Year Mortgage?
At the moment, there are two types of 40-year mortgages: those being offered by a very limited number of direct lenders, and the mortgage modification program from the U.S. government.
Let’s start with the mortgage modification program.
In June 2021, the Government National Mortgage Association (GNMA, or Ginnie Mae) announced it would enable securitization of mortgage modifications with terms of up to 40 years. Ginnie Mae is the agency that securitizes loans for FHA, VA, and U.S. Department of Agriculture (USDA) mortgages, so it appears the program will apply only to distressed borrowers with those loan types.
The purpose of the modification is to provide lower monthly payments through an extended loan term. It will apply to the nearly 2 million affected mortgages currently in forbearance under the above loan programs. There will be no restrictions on loan amounts, and it’s expected to take effect in October 2021.
There’s no indication if the 40-year loan term will extend to new originations of refinances or purchases on loans provided by FHA, VA, or USDA.
Direct Lender 40-Year Mortgages
Conventional mortgages, which are funded by Fannie Mae and Freddie Mac, as well as FHA, VA and USDA loans, must abide by certain restrictions imposed by the Consumer Financial Protection Bureau (CFPB). Those restrictions prohibit loan provisions like interest only, negative amortization, balloon payments, and loan terms exceeding 30 years.
These restrictions arose out of the excesses that resulted in the mortgage meltdown in 2008. In the process, they also limit the availability of 40-year mortgages.
The only 40-year mortgage types available are those provided by direct lenders. A direct lender is one that provides loans out of its own portfolio, rather than selling them to Fannie Mae, Freddie Mac, or Ginnie Mae, and mostly includes banks, credit unions, and other private loan sources.
Because 40-year mortgages are offered by direct lenders, the terms of those loans are not restricted by the CFPB. The lenders can set their own terms to the program.
If you do apply for a 40-year mortgage with a lender that provides one, it’s likely there will be a multitude of provisions that aren’t available with more common mortgage types.
For example, a direct lender can use an interest-only provision, as well as negative amortization, or a balloon payment feature. They can also determine the loan amount they’ll provide, as well as the minimum down payment requirements.
You should also expect a 40-year mortgage provided by a direct lender to be more difficult to qualify for. The lender may require more than the typical 3% to 5% down payment that applies to conforming loans. It’s also likely they’ll expect good or excellent credit, and low debt-to-income (DTI) ratios. Put another way, 40-year mortgages will be more difficult to qualify for than conforming loans.
40-Year Mortgage Rates
If you’re able to locate a lender that will provide a 40-year mortgage, expect to pay a higher rate than you would on a 30-year mortgage. That’s because the additional 10 years on the 40-year loan increases the lender’s risk, requiring a higher rate to compensate the lender for that risk.
You can generally expect the rate on a 40-year mortgage to be about 0.50% higher than for a 30-year mortgage.
40-Year Mortgages vs 30-Year Mortgages
Probably the best way to illustrate the difference between a 40-year mortgage and a 30-year mortgage is by providing an example of both scenarios. This will give you an idea what the financial benefits and costs of a 40-year mortgage really are.
Let’s assume you’re purchasing a $375,000 home with a $75,000 down payment (20%) and a $300,000 mortgage. You have good credit and income that will easily qualify you for both loan types. For simplicity’s sake, we’re going to look only at the principal and interest payment on the mortgage itself and ignore property taxes and insurance.
As noted above, our numbers reflect the fact that a 40-year mortgage will generally have a 0.50% higher interest rate than a 30-year mortgage.
Here’s how the 40-year mortgage stacks up against a 30-year mortgage:
|Loan Type / Category||40-Year Mortgage||30-Year Mortgage||Difference|
|Total Interest Paid||$215,498||$126,794||$88,704|
Notice from the table above that the primary benefit of the 40-year mortgage is that you’ll save $111 per month on your payment. That’s the basic advantage a 40-year mortgage provides. It may enable you to either more easily afford the home you’re purchasing or to buy a higher priced home.
But on the negative side you’ll be trading a lower monthly payment for a higher interest rate and a much larger amount of interest paid over the life of the loan.
The combination of a higher interest rate plus 10 additional years of payments means you’ll be paying almost $89,000 more for the 40-year mortgage than you would for the 30-year mortgage.
How to Qualify for a 40-Year Mortgage
The requirements for a 40-year mortgage from a direct lender are likely to be stiffer than what they will be for a conforming 30-year mortgage.
Differences in qualification you should expect to see include:
A larger down payment requirement. While conventional loans require down payments as low as 3% (3.5% for FHA, and 0% for VA), a direct lender for your mortgage may require a downpayment of 20% or more. There may be some lenders with lower requirements, but you’ll pay a higher interest rate in exchange.
Higher interest rates. Since the loans are provided by direct lenders, they can set their own rates. And since there are so few lenders providing 40-year mortgages, there’s not much competition forcing rates down. As noted above, expect to pay 0.50% more on average.
Higher closing costs. Conforming loans generally have closing costs that range between 2% and 4% of the loan amount. Closing costs may be higher on a 40-year mortgage because the lender has more flexibility to charge higher costs.
Good-to-excellent credit. Conventional loans have a minimum credit score requirement of 620, while FHA loans can go as low as 580. But a direct lender of 40-year mortgages may require a higher score, the minimum being maybe 680, 700, 720, or more.
Debt-to-income ratio. Conventional, FHA, and VA loans will usually allow a DTI as high as 43%. But a direct lender may set a lower limit on a 40-year mortgage.
Where to Get a 40-Year Mortgage
Once again, 40-year mortgages are not easy to find. Since the loans are not funded by the major mortgage agencies, like Fannie Mae and Freddie Mac, they are considered nonconforming mortgages. That means they’re only available through direct lenders – like banks and credit unions – that provide them out of their own portfolios.
The search for a 40-year mortgage will not be easy. They’re not commonly offered by major national lenders, which will require you to search available lenders in your immediate market.
For example, Quicken Loans/Rocket Mortgage – the largest mortgage originator in the country – doesn’t offer a 40-year option. And popular mortgage search sites, like Bankrate, don’t even offer search options for a 40-year mortgage.
That said, we did find two lenders that advertise 40-year mortgage products:
Massachusetts-based Needham Bank offers 40-year mortgages for both purchases and refinances. But since the 40-year program is a portfolio product offered directly by the bank, it’s available only to homeowners and buyers in Massachusetts.
The Needham Bank 40-year mortgage has the following features:
“5/5 ARM” program—the rate adjusts every five years.
Loans are serviced directly by the bank, and not sold to third parties.
The current rate is 2.875%, with an APR of 3.337%.
The current rate on 40-year jumbo mortgages is 3.250%, with an APR of 3.439%.
The maximum rate adjustment is 2% every five years, but there is a 5% lifetime cap. That means a rate that starts at 2.875%, can go no higher than 4.875% on the first adjustment, and no higher than 7.875% over the life of the loan.
Private mortgage insurance is available.
The bank does not advertise minimum down payment requirements, except to note that they do offer low down payment, which will affect the interest rate you’ll pay on the loan.
Though no maximum loan amount is stated, the bank’s website confirms they offer the 40-year mortgage for both conforming loan amounts (mortgages up to $548,250 but may be higher in high-cost markets) and jumbo loan amounts.
California-based NewFi is a mortgage company authorized to make loans in 24 states. They offer a 40-year mortgage with a 10-year interest-only payment. After the 10 years are up the loan converts to a fixed-rate mortgage, which will be fully amortized over the remaining 30 years.
Unfortunately, they don’t provide information on rates, loan amounts, or loan qualifications. Instead, they invite you to email or call for a custom quote.
Other lenders reported to offer 40-year mortgages include Bank of America and New American Funding, though we could find no evidence confirming that they actually do.
What to Consider Before Taking a 40-Year Mortgage
As you can see, a 40-year mortgage is a unique home financing loan.
Before considering a 40-year mortgage, the following should apply:
You want the smallest monthly payment possible.
You live in an area with very high house prices, making a 40-year mortgage the best alternative.
Appreciation rates in your area are high enough to overcome the slow equity buildup that comes with a 40-year mortgage.
You’re young and this is your forever home.
Carefully consider how a 40-year mortgage will affect your retirement. If you’re already over 25, the loan will not be paid off until you're over 65.
You have a plan to pay off or refinance the 40-year mortgage into a shorter-term mortgage in the future.
Pros and Cons of a 40-Year Mortgage
Your monthly payment will be lower than it will be on a 30-year mortgage, which will be easier on your budget.
Because the payment will be lower, you may be able to qualify for a larger home.
You’ll be adding 10 years of extra payments to the loan.
The interest rate will be higher than it will be on a 30-year loan for the same amount.
Because of the combination of the higher interest rate and the extended term, the total cost of the loan will be tens of thousands of dollars higher.
Equity buildup will be slower, which could leave you in a negative equity position if property values decline.
Since 40-year mortgages are not common, it may be difficult to find a lender that will provide one.
There can be provisions on 40-year mortgages that are not permitted on conforming loans. These can include negative amortization and balloon payments.
The main advantage of a 40-year mortgage is a lower monthly payment. But you’ll need to carefully weigh that single advantage against the several drawbacks the loan may include.
Since they’re provided by direct lenders, and are nonconforming loans, they can have various gotcha provisions. These should never be overlooked. Negative amortization can leave you owing more money than the original loan amount, and a balloon payment may come at an inopportune time.
Before signing up for a 40-year mortgage, first consider the alternatives. Most lenders have them, and you should look at side-by-side comparisons of those alternatives with the 40-year option, to see which may be the better choice.