What is a 40 Year Mortgage?

The 40 year mortgage isn’t an uncommon borrowing strategy for reducing house payments. Many mortgages are 30 years long and quite a few are 20 years in length. A shorter-term mortgage tends to mean house payments will be higher, but equity gets built into the home more quickly, if house prices are stable. In the late 1980s, many lenders, especially in higher priced housing markets, began offering 40 year mortgages so that people could afford more expensive homes.

It should be noted that a 40 year mortgage used to be the longest term loan most people could get. Some mortgage companies now offer 50 year mortgages, which can reduce payments more. There are difficulties with these longer length mortgages that borrowers need to consider.

Choosing a 40 year mortgage means the total price of the home is significantly higher because there is an additional 10-20 years of interest accrued on the loan. It’s a good idea to make comparisons with mortgage or home loan calculators online to see the total cost of a 40 year loan, as compared to 20 or 30 year loans. People end up paying a dramatic amount more to have a lengthier loan, and may not reduce payments greatly.

Another disadvantage of the 40 year mortgage is that very little of each payment builds equity. Most of payment amount covers interest on the loan. When housing prices drop, it’s easy for 40 year loans to turn upside down, even if a person has made several years of payments. Equity amounts are typically so small at first, that tiny fluctuations in housing prices can make the amount borrowers owe more than the value of their homes.

Some real estate and financial experts criticize the 40 year mortgage because of its length. A couple buying a first home in their 30s would be making mortgage payments in their 70s, which may seem unreasonable and difficult. More than a few people refer to these loans as mortgages inherited by borrower’s children.

On the other hand, there may be some investors who like the lower payment amounts on 40 year loans. If a person expects housing prices to rise, though this is a risky expectation, they may choose the lower payment because they plan to sell the home in a few years. This doesn’t always work, and if housing prices drop, investors can quickly lose any initial down payments made. Others plan to refinance homes a few years later and depend on housing price increase to build equity. Yet increases in home prices are not guaranteed.

Borrowers can find different types of 40 year mortgages. These include those with fixed interest rates, those with variable rates and some that have balloon payments well into the life of the loan. For instance, some feature balloon payments 30 years after the mortgage is first obtained.