40-year mortgage: An explanation, the pros and cons

f you’re looking to buy or refinance a home, particularly in a high-cost area, affordability can be a challenge. A 40-year mortgage has a lower monthly payment than a 30-year loan. However, because you’re taking longer to pay off the loan, you’ll pay more in interest. Another consideration with a 40-year loan is it’s a nonqualified loan, which means it may have some riskier features that qualified loans lack.

Key takeaways:

• A 40-year mortgage is one with a 40-year loan term.
• This could help with payment affordability, but you’ll pay more due to the higher interest rate and longer term.
• Rates may be fixed or adjustable but often come with additional features such as interest-only or balloon payments.

What is a 40-year mortgage?

While most mortgages have 15- or 30-year terms, a 40-year mortgage is repaid over 40 years.

A 40-year mortgage is a nonqualified loan. A qualified mortgage meets the Consumer Financial Protection Bureau’s consumer protection standards, one of which is a maximum loan term of 30 years.

While a longer loan term isn’t inherently risky, a borrower with a 40-year term will pay more overall mortgage interest. Interest rates on 40-year loans also tend to be higher because it’s more difficult for investors to predict what inflation will do over 40 years than 30.

Because 40-year loans don’t meet the standard for qualified mortgages, lenders who offer them often do so with nontraditional mortgage features. That means lenders may offer 40-year mortgages that allow interest-only payments or require a large balloon payment at the end of the term.

How does a 40-year mortgage work?

A 40-year mortgage can work like a conventional mortgage that takes longer to pay off. As a nonqualified loan, it also can include an interest-only term with a balloon payment at the end and a fixed-rate mortgage with an interest-only component.

To compare these options, let’s assume you’re buying a more expensive home with a $1 million jumbo mortgage at 7% interest.

If the loan is fully amortized like a conventional fixed-rate mortgage, the monthly payment for principal and interest is $6,214. At the end of your term, you’ll have paid $1,982,870 in interest. That’s in addition to the $1 million principal.

If you borrowed the same amount but the loan required interest-only payments and the balance due at the end of the term, the monthly interest payment would be $5,833.33. You’d pay $2,799,998 in interest plus the $1 million principal at the end of the term.

More common than a balloon payment is a 40-year mortgage with an interest-only time frame at the beginning of the loan, often 10 years. After 120 monthly payments, the loan is amortized over 30 years with principal and interest payments. The payment for the first 10 years would be $5,833.33 a month, meaning you’d pay $700,000 in interest. After that, you’d pay $6,653 a month for the next 30 years. You’d spend a total of $2,095,089 in interest.

Comparing 30- vs. 40-year mortgages

Let’s look at some of the significant differences between a 30-year mortgage and a 40-year mortgage.

A 40-year term saves you $439 a month but costs $587,781 more in interest.

Which lenders offer a 40-year mortgage?

It can be challenging to find a lender that offers 40-year mortgages.

However, Rocket Mortgage^® offers a Jumbo Payment Smart loan, which is a 40-year mortgage with a 10-year interest-only period at the beginning of the loan. It’s available for loan amounts between $806,501 – $2 million for primary residences, vacation homes, and investment properties. Here are some basic qualifying details for those buying their primary home:

• Down payment of 20% – 30% depending on the loan amount and whether you’re using the loan to buy a home or as a cash-out refinance
• 6 – 12 months of savings in the event of income loss
• 700 – 740 qualifying credit score
• 45% maximum debt-to-income ratio
• Single-unit homes only

Pros and cons of a 40-year mortgage

There are advantages and disadvantages to consider with a 40-year mortgage.

Pros

• It’s the lowest monthly payment you can get because of the longer term.
• The lenders who offer this may offer some different loan structures, like having interest-only terms to begin the loan so you can find an option that works best for you.

Cons

• You pay more interest over time, both because the interest rate tends to be higher and because the term is longer.
• The 40-year term means it’s a nonqualified mortgage. Because 40-year loans don’t meet government standards, lenders may add features that are riskier for the borrower, such as balloon payments.
• The home equity builds more slowly on a 40-year mortgage due to the longer term, which may make it harder to borrow your equity later. If there’s an interest-only time frame at the beginning of the loan, no equity builds during this period.

Alternatives to a 40-year mortgage

If you prefer not to be paying off your mortgage over such an extended period, there are some other more traditional options worth looking at:

• Conventional mortgages: Conventional mortgages are private loans. Conforming conventional loans follow federal guidelines and offer terms ranging 8 – 30 years. The minimum credit score and down payment are 620 and 3%, respectively, for first-time home buyers. You can avoid private mortgage insurance with a down payment of 20% or more. You can often request it to be removed when you reach 20% equity.
• Jumbo loans: A jumbo loan is a conventional mortgage that exceeds the conforming loan limit. Jumbo loans are usually used to buy more expensive homes. Since they don’t have to meet any federal requirements, the requirements and terms are at the discretion of the individual lender. In general, you can expect to need a down payment of at least 10% and meet more rigorous requirements for a minimum credit score and a maximum debt-to-income ratio. You may also be required to have sufficient cash reserves to cover 18 months of mortgage payments.
• Federal Housing Administration loans: FHA loans are available for primary residences with a 3.5% down payment. Most lenders, including Rocket Mortgage, require a credit score of 580. However, it’s possible to qualify with a score as low as 500 with a 10% down payment. There is mortgage insurance for the life of the loan if your down payment is less than 10%.
• Veterans Affairs loans: Eligible military personnel, veterans, reservists, and National Guard personnel can buy a home with no down payment loan with a VA loan. Although the VA sets no minimum, the credit score for a VA loan from Rocket Mortgage is 580. There are exemptions, but typically, a VA funding fee of between 0.5% and 3.3% is paid up front or built into the loan.

The bottom line: Consider your options

A 40-year mortgage has a term of 40 years. However, the variety of options available isn’t that simple. You can also choose from fixed- or adjustable-rate options, as well as those with interest-only and balloon payments. But not many lenders offer these loans, in part because they’re nonqualified loans that carry more risk. Be aware of what you’re getting.

If you’re interested in our Jumbo Payment Smart option or any other mortgage type, you can apply online.