Most people refinancing their homes choose 30-year term lengths without giving a second thought. What about 40-year mortgage loans? If you need the lowest possible payment choosing a longer term will accomplish this for you; however, what happens to your total cost for that extra ten years? Here’s the scoop on 40 year mortgage loans to help you make an informed decision for your next home loan while avoiding common mortgage mistakes.
40 Year Mortgage Loans
If you haven’t run across a 40 year mortgage when shopping for the lowest refinance rates you’re likely to encounter one soon. This is becoming a fairly common offering for mortgage refinancing despite higher refinance rates compared to 15 and 30-year options.
The most common option for your home loan is a 30-year mortgage; however, if you want the best deal for your mortgage dollar 15 and 10-year mortgages offer the greatest savings.
If you’re considering an Adjustable Rate Mortgage also called a hybrid ARM like a 5/1 or 7/1 Adjustable, these home loans typically come with 30 year term lengths. In the case of a 5/1 ARM your interest rate is fixed for the first five years and then adjusts every year for the last 25 years.
Pros & Cons of the 40-Year Mortgage
The main advantage of a 40-year mortgage over the traditional 30-year variety is the lower payment amount since your payments are spread out over the extra ten years. If you’re having trouble qualifying for a 30-year mortgage because of your debt-to-income ratio you could be approved for a 40-year term.
When refinance rate shopping you’ll notice that 40-year mortgages have higher interest rates than 30-year and 15-year mortgages. The reason for this is the longer you’re paying on a home loan, the more risk for the lender. Longer term-lengths come with higher interest rates.
The disadvantage of a 40-year mortgage is the amount of money you’re throwing away for that additional ten years of financing. Also, if you’re refinancing from a 15 or 30-year mortgage to a 40-year term length it’s going to be next to impossible to recoup your out-of-pocket expenses even if your payment is going down because of the financing cost for that extra ten years.
Those extra ten-years of financing also means you’ll build equity in your home at a snail’s pace; in many markets this means you could find yourself under water quickly, meaning you owe more than your home is worth.
If you’re considering a 40-year mortgage because it’s the only option available to you, beware home loans that are amortized as 40-years but due in 30. While the home loan is amortized at 40 years, you only get 30 years to pay it back. After 30 years the balance is due in one lump sum as a balloon payment.
The best advice I can give you when it comes to 40-year mortgages is to avoid them whenever possible. This is pretty much the home loan of last resort if you can’t qualify for anything else. You can learn more about avoiding common mortgage mistakes and getting the best deal for your next home loan by checking out my free Underground Mortgage Videos.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
