40-year mortgage: The ultimate guide

A 40-year mortgage extends the timeline for paying off your home a decade past the standard 30 years. The longer time frame makes monthly payments smaller but increases the total cost of your repayment.

If you’re purchasing a home or considering refinancing to reduce your monthly mortgage dues, a 40-year mortgage could provide a path to homeownership, albeit at greater risk and cost than shorter repayment terms. That’s because the trade-offs — including higher interest rates, fewer lender options and slower equity building — negatively impact your long-term finances.

How do 40-year mortgages work?

A 40-year mortgage is similar to a 30- or 15-year mortgage, except you pay the loan over four decades. As with shorter-term loans, the interest rate can be fixed or adjustable, and some lenders offer additional interest-rate options.

Because of the extended repayment period, 40-year home loans don’t meet Qualified Mortgage guidelines, a set of rules established by the Consumer Financial Protection Bureau (CFPB) to ensure homebuyers can afford their loans. Some 40-year mortgages have additional risky features, such as interest-only periods or balloon payments, which are also against the CFPB’s guidelines.

In addition to being classified as non-qualified, 40-year home loans are “non-conforming,” which means they’re not eligible to be sold to Fannie Mae or Freddie Mac, government-sponsored enterprises that purchase most conventional (non-government) mortgages from lenders (to lessen the lenders’ portfolio risk). As a result of being non-qualified and non-conforming, 40-year mortgages aren’t as widely available as 30- or 15-year home loans (more on availability below).

Common 40-year mortgage structures

Since 40-year mortgages aren’t standardized, loan terms vary by lender.

Comparison: 30-year mortgage vs. 40-year mortgage

Over time, the 30-year mortgage has become the standard home loan, with about 9 in 10 homebuyers choosing it in recent years, according to Freddie Mac. While a 40-year mortgage tacks on 10 years to the repayment timeline of a 30-year loan, there are other differences between the two products.

• Monthly payments: The monthly payments on a 40-year mortgage are lower than a comparable 30-year loan because the principal is spread over a longer period.
• Interest rates: Longer loan terms carry higher rates, so 40-year mortgage rates are typically higher than 30-year mortgage rates. And since the lender takes on additional risk by lending a non-qualified mortgage, expect even higher rates.
• Total loan costs: The total interest paid is higher on 40-year loans than on 30-year loans because of the higher rates and extended repayment time frame.
• Availability: All lenders typically offer 30-year mortgages, while 40-year mortgages are only available from smaller banks, some credit unions and specialty lenders.
• Loan structure: Most 30-year mortgages have an adjustable or fixed rate. The terms on 40-year mortgages are less standard and often include interest-only periods, balloon payments and other, potentially risky structures.

30-year mortgage vs. 40-year mortgage example

The following example compares a $400,000 loan with 30-year and 40-year terms. We’ll use the same interest rate on both mortgages to make an apples-to-apples comparison, but you can expect 40-year terms to generally have higher rates.

In this example, you’ll pay $177 less monthly with a 40-year loan. However, you’ll pay $232,550 more in interest over the long haul.

Bottom line: The higher borrowing costs and slower equity building of 40-year loans make them risky and expensive products for most borrowers. “In the first five or six years of a 30-year mortgage, almost all of the payment is going towards interest,” said Sarah Mancini, co-director of advocacy at the National Consumer Law Center. “That initial time frame would be longer with a 40-year mortgage.”

However, with mortgage affordability a continued challenge amid elevated mortgage rates and high home prices, a 40-year loan can provide a path to homeownership if you wouldn’t otherwise qualify for a loan. “In particularly expensive housing markets, a 40-year mortgage might make the difference between a housing payment that is affordable versus not affordable,” said Mancini.

The pros and cons of 40-year mortgages

The main appeal of a 40-year mortgage is the lower monthly payment and increased affordability compared to shorter-term loans. Because smaller payments lower your debt-to-income ratio, you may qualify for a mortgage more easily or at a higher amount with a 40-year term. Additionally, some 40-year mortgages offer flexible options, like an interest-only period, which can further reduce monthly payments.

However, the flexibility of 40-year mortgages comes at a significant cost. You’ll pay more interest than on shorter-term loans — often hundreds of thousands of dollars more. Additionally, 40-year mortgage interest rates are typically higher. And because fewer lenders offer 40-year loans, you’ll have little opportunity to negotiate terms.

In addition to higher costs, you’ll build equity more slowly with a 40-year mortgage. And the extended repayment term can affect your ability to meet other financial goals.

“From a straight investment standpoint, a 40-year mortgage means it will take longer to recoup the upfront costs of purchasing a home,” Mancini said.

How to find 40-year mortgages

“The 40-year mortgage is not a common option available with most lenders,” said Valerie Saunders, volunteer president of the National Association of Mortgage Brokers. You’re not likely to find 40-year terms at large national banks, but you may find them at regional and community banks, credit unions or specialty mortgage lenders. A mortgage broker can also help you find a lender that offers 40-year loans.

Good to know: None of the above lenders prominently advertise their 40-year mortgage interest rates, which makes it even more difficult to compare lenders and loan options. If you’re intent on a 40-year loan, contact lenders’ customer service to ask about their APRs, and get preapproved with the best mortgage lenders for your needs.

Can you extend your mortgage term to 40 years?

Depending on your circumstances, you may be able to lengthen an existing loan to 40 years.

40-year mortgage loan modification

If you’re having trouble affording your monthly mortgage payments, contact your lender immediately; you may qualify for a loan modification program that extends your mortgage term, such as:

• FHA 40-year mortgage: The Federal Housing Administration offers a 40-year loan modification option to existing FHA borrowers.
• Fannie Mae or Freddie Mac Flex Modification: If you have a conventional mortgage backed by Fannie Mae or Freddie Mac, you may be eligible for a Flex Modification, which extends the term to 40 years and aims for a 20% reduction in your payment.

To qualify for a loan modification, you must apply and meet your lender’s guidelines, including going through a trial period.

“A homeowner struggling with their current mortgage will typically only be offered a 40-year loan modification term if the 30-year term is not affordable,” said Mancini.

Here’s an example of how a 40-year loan modification may look if you’re five years into a 30-year term on an initial $400,000 mortgage with a $364,632 remaining balance. For the sake of comparison, we’ll assume the same (Covid-19-era mortgage rate of 4.5%) for the modified loan.

While the modification provides a payment reduction of $388 each month, it results in paying $178,817 more for the loan. (Use a free online mortgage payment calculator for your own calculations.) Keep in mind that loan modification terms depend on your exact situation.

Refinancing to a 40-year mortgage

If you don’t qualify for a modification, you may be able to refinance your existing loan to a 40-year term, provided you have enough home equity. However, you’ll also pay refinance closing costs ranging from 2% to 6% of the loan amount — and potentially face a higher mortgage rate.

When considering a refinance, use a free online mortgage refinance calculator and estimate your break-even point, or how long you have to remain in the home to recoup the expense of the refinance. To do so, divide the closing costs by the monthly savings.

Example: Using the loan modification terms above, if closing costs totaled 3% — $10,939 (or .03 x $364,632) — you’ll need to stay in the home for two years and five months to cover the expense of the refinance ($10,939 / ($2,027-$1,639) = 28.2 months).

Related >> How does refinancing a mortgage work?

Alternatives to a 40-year mortgage

Extending your mortgage beyond the standard 30-year repayment term is one way to reduce your monthly payments, but you have other options. A housing counselor or your lender (if you already own a home) can help you identify your options if you’re a homebuyer or homeowner.

If you’re buying a home

• FHA loans have lower interest rates and more flexible qualification requirements than conventional loans.
• USDA loans have no minimum down payments if you have low to moderate income and are buying a home in an eligible rural area. Depending on your income and loan type, you may also qualify for a 33- or 38-year repayment term.
• VA loans offer military borrowers and eligible spouses no-down-payment loans at competitive interest rates.
• Adjustable-rate mortgages (ARMs) provide lower monthly payments (at least initially) than fixed-rate loans. Keep in mind that rates adjust at regular intervals after an initial fixed period, and could increase over time.
• Buying discount points at closing can lower your monthly dues for the entire loan term. Calculating your break-even point can determine whether purchasing points is cost-effective.

If you already own a home

• Refinancing your mortgage to a lower rate or longer term can reduce your payments. However, you’ll pay closing costs, increase your total loan expense and lengthen the time it will take to pay off your home.
• A loan modification (including a 40-year FHA mortgage for existing FHA borrowers) can alter your mortgage terms if you have trouble affording your payments. In addition to extending your loan term, a loan modification may reduce your interest rate or lower your principal balance.
• Mortgage forbearance is another option if you’re experiencing financial hardship. Forbearance may mean pausing your payments or reducing your monthly payments temporarily.
• A short sale allows you to sell your home and pay off your mortgage even if you owe more on your loan than the property is worth. If you’re struggling with your payments, a short sale can help you avoid foreclosure.
• A deed-in-lieu of foreclosure returns ownership of your home to your lender without going through the foreclosure process.

Frequently asked questions (FAQs)