40 Year Mortgage: Pros and Cons

40 year mortgage loans have become quite popular, rather than the standard 30 year mortgage. Here are some pros and cons:

Lower Payments

Home buyers looking for a way to reduce their payments as much as possible, allowing them to get into the market should consider a 40 year loan.

Buy During Higher Interest Rates

It's also beneficial during periods where the interest rates are high. Allowing for a longer amortization period helps to keep the payment affordable.

Buy More House

The 40 year mortgage loans allow you to buy more a house that's worth more while keeping your payment at the same level you would have on a 30 year mortgage.

Lower FICO Score Needed

Normally your FICO score must be around 580 for a traditional mortgage term. However, with a 40 year fixed loan it can be as low as 500 allowing more people to enter into the market.

Loan is Fully Amortized


40 year mortgage loans are fully amortized which means with each monthly payment you pay a small amount towards the principle. Therefore your mortgage balance will decrease. This is a key benefit over an interest only loan.

A Lot More Interest


On 40 year mortgage loans you'll pay a lot more interest than you would on a 30 year mortgage, and yet the difference in the actual payment amount is actually minor. For example, if you purchased a home for $350,000 you would pay $850,000 in interest over 40 years. That same purchase price over 30 years would cost your $650,000 in interest. That's a whopping $200,000 more in interest paid and yet the difference in payment amounts would be around $40 a month.

Higher Interest Rate

You can expect your interest rate to be 0.5% to 1% higher than you would pay on a 30 year fixed loan. It may not seem like a lot but translated to 40 years and using our example above it could cost you around $200,000 more.

You Don't Get 40 Years to Pay

Most people aren't aware that fixed 40 year mortgage loans aren't actually for 40 years. Most of these mortgages, and especially those that are sub prime, are amortized over 40 years, but actually due in 30 years with a balloon payment. If you are looking at a 40 year mortgage make sure to get all the details first.

If you have been looking at 40 year mortgage loans you might consider a 30 years fixed loan if you are planning to keep the home and the mortgage for some time. 40 year mortgage loans are right for some. The key is to look at all your options before making your decision. Why not talk to a mortgage consultant.