Are 40-Year Mortgages Really a Thing?
Marilyn Lewis
Wondering how to squeeze your monthly mortgage payment as low as it possibly can go — and then squeeze it some more? A 40-year mortgage is one way to do that.
In theory, there's a lot to like about a 40-year mortgage. Structuring the loan over 40 years — rather than the more typical 30 years — may help borrowers qualify for a slightly larger loan amount or shrink monthly payments. Both prospects have particular appeal where real estate prices are high and borrowers want to qualify for as much as possible.
The disadvantages are costly for home buyers, however. For one thing, you're making interest payments for 10 more years.
For another, when a mortgage is stretched over 40 years, it takes longer to build equity in a home. That increases the odds that real-estate prices could drop, leaving you owing more on the mortgage than the home is worth. To cover that risk, 40-year lenders charge a slightly higher interest rate, says Keith Gumbinger, vice president of HSH.com, a mortgage information company.
Even if the downside doesn't discourage you, chances are slim you'll find one of these loans in the current market, where they're mainly used for modifying troubled mortgages. Today, 40-year mortgages make up just a fraction of 1% of all mortgages sold, according to CoreLogic, which tracks and analyzes mortgage information.
A 40-year vs. a 30-year loan
Gumbinger compares the costs and savings of a 40-year term and a 30-year term on a $200,000 mortgage:
30-year mortgage, 4% interest: Monthly payment of $955. After five years you'd have almost $20,000 in equity, leaving a balance owed of about $180,895. At the end of 30 years, you'd have paid $143,739 in interest.
40-year mortgage, 4.25% interest: Monthly payment of $867. After five years you'd have about $10,000 in equity, leaving a balance owed of $189,397. By the end of 40 years, you'd have paid roughly $216,275 in interest.
The difference in the monthly payment is "not a huge amount," Gumbinger says, "but for some borrowers, it was just enough to get them over the hump" to borrow a bit more money or make the payment manageable.
Never truly popular
Even in their brief heyday in 2007, 40-year mortgages were a rare beast — less than 2% of all new purchase and refinance mortgages. They were a bit more popular in California's high-priced real estate market, according to CoreLogic.
Their popularity began to plunge late that year as the real estate market worsened.
In 2014, the federal government stopped giving lenders legal protection for lending mortgages that ran longer than 30 years. That made 40-year loans riskier for lenders, and since then, few have been interested in making these loans, says Frank Nothaft, CoreLogic's senior vice president and chief economist.
"Relative to the national [mortgage] origination landscape, it is pretty much a trivial product," he says.
Still found in loan mods
Tom Trimbath, a freelance writer, consultant and homeowner in Clinton, Washington, is grateful for his 40-year mortgage, with its low interest rate and affordable payments of about $900 a month. It was a lifeline — offered to him in 2014 by his lender as part of a HAMP mortgage modification after Trimbath's income dropped and he couldn't afford to make his mortgage payments.
Modifying troubled mortgages remains one of the last uses of 40-year mortgages, Gumbinger says. Although the Home Affordable Modification Program ended in 2016, Fannie Mae and Freddie Mac Flex Modification programs can use 40-year mortgages to bring borrowers' payments to an affordable level.
For Trimbath, the 40-year loan is working well, especially since he has no plans to move soon. "I'm happy with the present and willing to accept what's lined up for the future," he says.
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Marilyn Lewis is a staff writer at NerdWallet, a personal finance website. Email: mlewis@nerdwallet.com.