A mortgage for 40 years is a long time to commit yourself financially, so you should understand the details of choosing a mortgage interest rate over the span of 40 years.
How the 40-Year Mortgage Works
The mortgage payment on a 40-year loan is lower than you would ordinarily expect to pay on a 30-year fixed mortgage. Typically, a 40-year loan gives you an extra 10 years to pay the balance. However, there are some 40-year mortgages that balloon at the 30-year threshold; although, they are amortized over a 40-year period. After 30 years, you may owe the entire balance in one lump sum loan payment.
Buying a house with a 40-year mortgage has several benefits. You should compare the pros and cons to be sure you can benefit from a longer mortgage. This will allow you to choose the best mortgage option for your situation.
Benefits of a 40-year mortgage
Lower rates allow borrowers to purchase a more-expensive home.
You can deduct mortgage interest payments, from your taxes, for a longer period.
You may qualify for a home loan more easily due to the lower monthly mortgage payments.
Your mortgage payment will be lower than it would be with a 30-year mortgage.
Disadvantages of a 40-year loan
The mortgage loan term may be too long for the average borrower. Typically, most homeowners don’t live in their homes for 40 years.
A 40-year mortgage loan typically has higher interest rates than mortgages with shorter terms.
Over the span of a 40-year mortgage, you gain equity at a slower pace than your 30 year mortgage.
40-Year Mortgage Loan Types
The choice to buy a home is a big decision that you must consider carefully. Take the time to research and make sure you get the best loan for your budget.
Fixed-Interest Rate Mortgage
Fixed-interest rate mortgages have a guaranteed interest rate for the entire term of the loan. Unlike adjustable-rate mortgages, fixed-rate mortgages are not dependent on the mortgage index. The interest rates are determined in advance and set at a specific rate.
The adjustable-rate mortgage interest rate fluctuates during the term of the loan. Borrowers may have three to seven years of fixed mortgage interest rates, followed by variable rates throughout the remaining term of the loan. The adjustable-rate mortgage is risky. However, it is a good option when you’re buying in a seller’s market and don’t want to get stuck with a super-high interest rate for the life of your loan.
Balloon Payment Mortgage
The balloon payment mortgage is when the entire mortgage is due once you reach 30 years. Borrowers have the option to pay off the remaining balance at that time, or they can refinance the balance over the 10 year period. If you anticipate receiving a large lump sum of cash in the future, a balloon payment mortgage may be an option.
Finding a 40-Year Mortgage Lender
Borrowers have to be selective when choosing a lender for a 40-year mortgage interest rate loan. There are several lending companies available through Fannie Mae. For instance, Coldwell Banker offers 40-year mortgage loans as part of its federal lending program. Choose a lender who has the best options for your situation. Before you decide on a lender, read the fine print to verify that the terms are in-line with your current financial plan. A 40-year mortgage is a long-term commitment, and you want to be certain you can meet the obligations before signing on the dotted line.