The 30-year mortgage has been the gold standard in home lending over the last 50 years. With payments and rates locked in for the life of the loan, it’s considered a safe and conservative mortgage. When comparing the 40 year mortgage vs 30 year mortgage, which one will best benefit you?
Short-lived alternatives have appeared through the years—like the proliferation of Adjustable Rate Mortgages (ARMs) in the early 2000s—but rarely last. Today, ARMs only account for 8% of the total mortgage market.
With home prices breaking new records across the United States, the 40-year mortgage has been re-introduced to lengthen the loan term, helping to reduce the monthly payment. This article will help you better understand the 40-year mortgage, its benefits and the risk versus a 30-year.
What’s a 40-year mortgage?
A 40-year mortgage is a home loan that amortizes—reduces with regular payments—over the life of the loan. The 40-year is an option offered to borrowers who are interested in reducing their monthly payments by adding ten years to the conventional 30-year mortgage.
The 40-year was the most popular mortgage product in the United States before the 30-year mortgage became prevalent in the 1970s.
Comparing a 40 year mortgage vs 30 year.
Both the 40-year and 30-year mortgages are similar in structure. They are fixed-rate, fully amortized loans. Amortized loans are a type of installment loan with fixed monthly payments that include interest and principal. The principal is the amount that’s applied to the loan balance.
With an amortized loan, your payment remains the same for the life of the loan; however, the majority of your payment applies to interest initially, decreasing with each payment.
- Loan term. Like the 30-year, the 40-year is a fully amortized loan with fixed monthly principal and interest payments.
- Monthly payments. An additional 120 payments with a 40-year mortgage.
- Rate. Typically, 40-year mortgages have higher rates than 30-year mortgages.
- Origination costs. Since not all lenders offer a 40-year, origination fees may be higher. As well, it’s a non-qualified loan that doesn’t limit the amount lenders can charge for closing costs.
A 40-year mortgage will cost you more long term.
While the 40-year mortgage does offer monthly savings, it may not be the best option long term. Since amortized loans front-load interest, you pay more towards interest—and less towards principal—for an extended period.
The chart below shows the difference in interest and principal payments from the first nine payments to the last. Illustrating how much interest is paid at the beginning of the loan.
It’s important to consider the amount of time you plan to live in the home when taking out a 40-year mortgage. Over the 40-year life of the loan, you could pay an additional 50% in interest vs. a 30-year mortgage.
The calculation below, from mortgagecalculator.org, shows how much interest and principal you pay over the life of each loan.
It’s important to consider the amount of time you plan to live in the home when taking out a 40-year mortgage. Over the 40-year life of the loan, you could pay an additional 50% in interest vs. a 30-year mortgage.
The calculation below shows how much interest and principal you pay over the life of each loan.
After an additional ten years—and 50% more interest paid—the monthly savings in the above example are $95.92 with annual savings of $1,151.04. As interest rates increase, the savings decrease.
Is a 40-year mortgage right for you?
Due to rapidly rising home prices, many potential home buyers are being priced out of the housing market. While you may be able to afford a higher payment, your debt-to-income ratio could cause lenders to decline the loan.
A 40-year mortgage may help reduce debt-to-income just enough to help with the approval of a loan. When you earn more income over time—or decrease debt—the loan can be refinanced to a 30-year mortgage, saving you money in interest payments over the long run.
In conclusion.
A 40-year mortgage is an option to consider if you’re searching for a lower monthly payment. However, keep in mind the long-term effects of stretching out a loan over 40 years. Work with a loan officer to see if this option makes sense for your unique financial situation.
Both 30-year and 40-year mortgages are amortized loans with monthly payments that include principal and interest. Comparing monthly payments, upfront costs, and rates is essential when shopping around.
Purchasing a home is a long-term investment. Unlike the early 2000s, thankfully, there aren’t as many predatory loans today. While researching loan products, and one sounds too good to be true—like interest-only ARMs—discuss it with a competing lender to get their opinion and professional view.
First&Sold is not a mortgage broker. But, we’ll be more than happy to make an introduction to one of our trusted partner lenders.
