Your Ticket to Homeownership or a Financial Trap?

A 40-year mortgage may be rare, but it can make home ownership more affordable. This is because it can spread out your mortgage payments over a longer time. While the affordability and flexibility this type of mortgage offers are appealing, the total interest you’ll end up paying and the longer time it’ll take to build equity might not be worth the risk.

What Makes 40-Year Mortgages So Popular?

Forty-year mortgages may not be widely known. These mortgage products are considered non-qualified, which means they don’t meet the standards set by the Consumer Financial Protection Bureau (CFPB).

However, 40-year mortgages are offered by traditional and non-traditional lenders. They may be used for new purchases in rare cases but are commonly used for loan modifications, especially for borrowers who may be on the verge of default and/or foreclosure.

Taking on a 40-year mortgage makes it more affordable to keep your home. That’s because it lowers your monthly payment by spreading out your mortgage repayment over a longer period.

Reasons Behind the Trend

Many of the factors that contributed to the rise of the 40-year mortgage are economic. For instance, increased labor, material, and construction costs often lead to higher real estate values, which make it harder for homeowners to afford the payments associated with traditional 30-year mortgages.

Inflation and the rising cost of living can also have an impact on why the 40-year mortgage is such a popular loan option. Many homeowners in the United States are looking for better ways to finance or refinance their home loans as prices increase and wages for most workers have remained stagnant since the 1970s.

A shortage of housing supply and higher demand, especially in more desirable areas, further drives up prices. This gives sellers less incentive to lower prices and makes it more challenging for borrowers to find affordable options. If they do find them, they’ll need loans that give them payments they can afford, which the 40-year mortgage may offer.

Long-Term Impact of 40-Year Mortgages

Although 40-year mortgages can make life more affordable, there are some negatives you have to take into account before you go looking for one.

• Higher interest costs: Your payments may be lower, but stretching out your repayment term means you’ll pay more in interest over the life of your mortgage. The bulk of your mortgage payment is dedicated to interest during the earlier years. As time goes on, this shifts, with more of the payment going toward the principal balance until the loan is paid off in full.
• Higher interest rates: These mortgages are generally considered riskier than traditional ones because they involve a longer repayment period. As such, the interest rates are also typically higher. Keep in mind, however, that your credit score and other factors will also affect your rate.
• Slower equity building: Having a longer loan means it takes longer to build equity in your home. This is because less of your payment is going toward reducing the principal balance. As such, a 40-year mortgage doesn’t give you much flexibility in the future, especially if you need to refinance, take out a home equity loan, or sell your home.
• Impact on your retirement: If you refinance with a 40-year mortgage, there’s a good chance that you could be repaying well into retirement, which means you could be dedicating a significant portion of your retirement income to mortgage payments. Carrying a mortgage during retirement isn’t inherently a bad thing, but it does limit your ability to accumulate wealth and increases the risk of foreclosure.

Additional Considerations

Another thing to consider regarding a 40-year mortgage is the limited availability of these loans. You may have trouble finding a lender that offers a 40-year mortgage because they aren’t as widely available as their traditional counterparts. And remember, these products are usually meant for refinancing rather than new mortgages.

And don’t forget about the extra costs. As with any other form of refinancing, you’ll have to pay closing costs. This could be anywhere between 3% and 6% of the total loan amount. These costs include origination fees, appraisals, title insurance, courier fees, survey fees, transfer taxes, and attorney fees.

The Bottom Line

Although the 40-year mortgage is non-qualified, it can make life more affordable because it can lower your payments by stretching them out over a longer period. But you’ll pay more in interest, take longer to build equity in your home, and it may be harder to find a lender who offers one since they aren’t widely available. Do your research and ensure this product is right for you before you sign up.