Is a 40-Year Mortgage a Viable Option for You?

In the mortgage industry, the 40-year mortgage is a relatively new concept. Most mortgages do not go past 30 years and the 40-year option has only been available as a niche product for certain home buyers. However, they are becoming more and more mainstream as home buyers are looking for more affordable options when making the leap into buying a house.

With a 40-year mortgage, the borrower pays a lower mortgage payment each month than they would if they took out a 30-year mortgage. That’s one of the appeals of the longer mortgage option. However, it does have its disadvantages, too. Since the loan is spread out over an extra 10 years, the borrower will pay much more by the end of the loan term in interest and other charges.

Another problem with 40-year mortgages is that you are likely going to pay higher mortgages rates with this option. We already know that mortgage rates are starting to go back up for 30-year fixed loans, but you can expect to pay an extra quarter of a point or more when you choose a 40-year mortgage over a 30-year mortgage.

One of the reasons 40-year mortgages are not as popular is because the lenders are unable to sell those types of loans to investors through Fannie Mae, Freddie Mac and other government-sponsored enterprises. The mortgages stay on the books for too long and the money gets tied up longer than investors like.

Before agreeing to a 40-year mortgage, there is one question you should ask yourself: Is this home more than I can afford? If the only way you can afford the home you want to purchase is by taking out a 40-year mortgage on it, it may be wise to search for a less expensive home that you can afford with payments spread out over a 30-year period. Many financial gurus like Dave Ramsey and others suggest that you only buy a home you can afford on a 15-year fixed rate mortgage.

This is not to say that you should never go with a 40-year mortgage. However, you should always way all of your options before making your final decision on any type of mortgage. Have you considered an interest-only mortgage? Or have you looked at the adjustable rate mortgages that are available? Often these types of mortgages offer a lower interest rate that can help bring your monthly payments down to a more affordable range as well. Be sure to do your homework before making a 40-year commitment that will take you into your retirement years.