Stretch It Out: Is a 40-Year Mortgage Right for You?

Like all fixed-rate mortgages, your interest rate will never change with a 40-year, fixed-rate mortgage. Your rate will remain the same until you pay off your loan, refinance your 40-year mortgage into a new loan or sell your home.

The difference between a 40-year mortgage and other fixed-rate loans comes in the term. The 40-year mortgage comes with a longer term than other loans, one that stretches four decades.

As with other mortgages, you’ll pay this loan back with interest in regular monthly payments. If you hold your loan for its full term, you’ll make 480 payments — 40 years of 12 monthly payments.

What is the benefit of a 40-year mortgage?

The biggest benefit of a 40-year, fixed-rate mortgage is the low monthly payment. Because the repayment period of this loan is stretched out over so many years, your monthly payment will be lower than if you took out a 15-year or 30-year, fixed-rate loan.

This could provide financial relief if you are worried about paying your other bills: Refinancing from a 15-year into a 40-year loan could save you hundreds of dollars a month.

What are the drawbacks?

There are some drawbacks to such a long-term loan. First, you’ll pay far more in interest with a 40-year, fixed-rate mortgage than you would with a shorter-term loan, sometimes tens of thousands of dollars more. That makes a 40-year loan one of the most expensive mortgages you can take out.

Second, it can be difficult to find lenders who provide these loans. These longer-term loans are nonconforming loans. They are also riskier for lenders because with a longer term, there is a greater chance that borrowers will miss payments. Because of this, fewer lenders provide these loans. You can also expect a higher interest rate when you do find a lender that originates 40-year, fixed-rate loans.

A look at the numbers

So, what is the difference in monthly payments and interest between 15-year, 30-year and 40-year, fixed-rate loans? Here’s a look at the differences:

Monthly payment:

• If you take out a 15-year, fixed-rate mortgage for $300,000 at an interest rate of 5.51%, your monthly payment will be $2,452, not including the money you pay for property taxes and homeowners’ insurance.

• If you take out a 30-year, fixed-rate mortgage for $300,000 at an interest rate of 6.32%, your monthly payment, again not including taxes and insurance, will be $1,860.

• With a 40-year, fixed-rate mortgage for the same amount at an interest rate of 6.85%, your monthly payment, not including insurance and taxes, will be $1,831.70.

As you can see, there is a big difference in terms of the monthly payment when you compare 15-year and 40-year mortgages. But this difference isn’t quite as substantial when going from a 30-year to a 40-year mortgage.

Interest:

• With the 15-year mortgage above, you’ll pay a total of $141,595 in interest over the life of your loan.

• With the 30-year mortgage referenced above, you’ll pay a total of $370,488 in interest over the life of your loan.

• With the 40-year loan above, you’ll pay $579,215.50 in interest over the life of your loan.

As you can see, you’ll pay much more interest when paying off a 40-year, fixed-rate loan. You’ll have to determine whether the lower monthly payment is more important than the higher overall costs of this type of loan.