40-Year Mortgage (Is It Really Right For Your Situation?)
Are you wondering if a 40-year mortgage is the best choice for your situation? Learn about the pros and cons in this article.
There may be a lot of misinformation when it comes to real estate investment, but one thing that is generally accepted is that mortgages are long. Long and expensive. But exactly how long and expensive depends on many factors. One of which is the lender chosen, and then length of the mortgage. Today we are going to discuss a 40-year mortgage and whether this is best for you when it comes to your real estate investment. It may seem strange to want to have a mortgage for longer, but it does have its pros and cons.
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What is a 40-year mortgage?
It is evident from the name that a 40-year mortgage is a type of mortgage that will last for 40 years, but what is the significance of the length of time? 40 years is an exceptionally long time, especially if you are purchasing a property later in life. You may be right in thinking that a standard mortgage has always been between 15 and 30 years. This extended time frame is what makes the 40-year mortgage different.
So, what is the significance of the extra time? The reason why some people will opt for a longer mortgage is simple – the monthly interest rates will be lower. The reason for this is highlighted by Lending Tree as being that while this lower monthly interest rate may exist, the overall interest you will pay on the life of the loan will be higher. So even though it may be $100 a month cheaper, you will be paying for longer and the total cost of the property will be more.
What are the different types of 40-year mortgages?
No two mortgages are identical and depending on the lender and type of mortgage you choose; the limitations and conditions will be different. Bank Rate lists the main types of 40-year mortgages as being the following.
The interest rate will not chance over the life of the loan. The benefits are that you will know what you will be paying, however you risk interest rates lowering in a few years and missing our on the lower potential payments.
The opposite of a fixed rate. The rate you pay depends on market conditions and will fluctuate. You run the risk of interest rates rising over the years, but they could also drop and benefit you.
Some lenders may let you pay the interest only for a portion of the loan (typically 10 years). You will only pay interest so your repayments will be lower, but you run the risk of default down the road by not paying off any of the loan principal in that time.
The type of 40-year mortgage you choose will depend on ion your tolerance to risk and how you expect the markets to fluctuate in the future. No one can know definitively how interest rates will change, so there is no one best solution for everyone. Whatever you feel most comfortable with will be best for you.
How to find a lender for a 40-year mortgage
Lenders that offer 40-year mortgages are rare and can be difficult to find. There is more risk for a lender offering such a long loan term, as anything can happen in that time. It can be easier to qualify for a 40-year mortgage as monthly payments will be lower, but the issue can be finding a lender you are comfortable with.
Smaller or regional banks will be more likely to offer a 40-year loan, as will some credit unions. One of the banks that are proud to offer a 40-year mortgage is Needham Bank. Specifically, they offer a 5/5 adjustable rate, meaning the interest rate adjusts every 5 years. The best way to find a lender that will offer a 40-year mortgage is to talk to them. Some will not advertise such long mortgage terms openly but may be open to it if you can justify it to them.
Pros and Cons of the 40-year mortgage
Like anything in the real estate investment world, 40-yerar mortgages have their pros and cons, and whether it is worth it will depend on the buyer in question and their personal situation. The Balance goes into detail the main pros and cons of such a long loan.
The main benefit of a 40-year mortgage, and the main draw for them is lower monthly repayments. Having a longer loan and therefore smaller repayments could mean that a buyer could afford a larger or better home than otherwise available.
All lender conditions will be different, but generally you need exceptional credit to get a 40-year mortgage. Which will put some people at a disadvantage immediately. You also cannot get a Federal Housing Authority (FHA) loan for 40 years.
The main disadvantage of the 40-year loan is that you will pay more in interest over the life of the loan and build equity slower. You can expect to pay an extra .25% more for a 40-year loan than you would for a 30-year loan for the same amount. 40-year mortgages are also considered unqualified mortgage, which is one of the reasons that its so hard to find them. Qualified mortgages are always going to be preferred as they are covered by the Consumer Financial Protection Bureau (CFPB). Anything over 30 years is automatically unqualified.
As a rule, 40-year mortgages are hard to find and as a whole more expensive, but you will pay less per month. You will be seeing short term savings but will have spent more in the long term. Even so, there are plenty of people who are interested in 40-year loans, and in the right circumstances it could work fore them. Shorter mortgages will always be ideal if you can afford them, but if a longer mortgage means the difference between home ownership or not, then it could be worthwhile.
Charles is the founder of infoSpike.com. He enjoys real estate investing, marketing, and personal finance. Read more about Charles here.