You must explore all of your options before signing your mortgage. While conducting your due diligence, you may hear about a 40-year mortgage and wonder if that kind of loan makes sense for your situation.
Mortgages are major commitments. Knowing what you are getting into before signing any loan agreement’s dotted line is best. In this article, we will focus specifically on 40-year mortgages. Take this opportunity to learn more about those home loans and see if they present the best value proposition.
What Is a 40-Year Mortgage?
The term 40-year mortgage already gets to the heart of what this loan is. Whereas conventional mortgages typically span 8, 15, or 30 years, this particular loan tacks on more time to that. Assuming you stick to the mortgage terms and avoid missing any payments, you can pay off this loan completely after 480 months.
Also, 40-year mortgages can be fixed or adjustable-rate agreements. Carefully consider which option will suit your financial situation better because you will be locking that in for the next four decades.
Which Lenders Offer 40-Year Mortgages?
Traditional home loans are easy to find. You can approach any lender who dabbles in mortgages, and they can likely present you with 8, 15, or 30-year plans. But what about 40-year mortgages? Are they easy to find as well?
Although not as common as traditional home loans, 40-year mortgages are not that difficult to find. You may find them offered by banks, credit unions, mortgage brokers, and private lenders. Even the government offers 40-year mortgages.
New rules set by the U.S. Department of Housing and Urban Development will allow FHA (Federal Housing Administration) loan owners to modify their existing agreements. Thanks to these upcoming changes, the maximum term limits for those loans will go from 360 months to 480 months. In other words, 40-year mortgages will soon become available courtesy of the government.
If you have looked into getting a 40-year mortgage but could not find any good options, you should know that things are different now. As a result, 40-year home loans are easier to find and have become viable options for more buyers.
How Do You Secure a 40-Year Mortgage?
Despite the differences between 40-year mortgages and more conventional home loans, applying for both remains the same.
Start by identifying your desired mortgage lender and prepare the requirements they request. Now that you have chosen your preferred lender, you can seek pre-approval for your 40-year mortgage. After determining how much you can spend on your new home, you can hire a buying agent and ask them to help you find the best properties within your price range.
Once you have chosen the property you want to buy, you need to submit your offer. Then, negotiate with the property owner until you get good terms for a deal. Real estate agents usually handle these negotiations on both sides.
Hopefully, you and the seller can come to terms with a price for the property. Then, when you finally reach an agreement, you can return to your lender and complete the application process.
What Are the Advantages of a 40-Year Mortgage?
Now that we know more about the basic elements of 40-year mortgages, we can start talking about their advantages and disadvantages. Let’s begin by discussing the advantages they present in this section of the article.
40-Year Mortgages Come with Lower Monthly Payments
Many buyers considering 40-year mortgages do so because they know the monthly payments with other setups are too steep. The $3,100 monthly payment for a 30-year loan is not something they can afford. They may have multiple income streams, but they are still unsure about meeting those monthly obligations.
If you are in a situation similar to what we described, you do not need to abandon your dreams of becoming a homeowner. Instead, you can make monthly payments by taking out a 40-year mortgage. The difference in monthly amounts between a traditional and a 40-year mortgage can also be pretty significant.
40-Year Mortgages Have Flexible Payment Structures
In addition, 40-year mortgages also come with flexible payment structures, making them more enticing to potential buyers.
To ease yourself into your new mortgage, ask the lender if they will allow you to only make interest payments for a few years. Then, after setting your budget or securing additional income streams, you can work on making full payments.
That is only one example of a flexible payment structure for a 40-year mortgage. You can negotiate the specific terms with your lender before signing your loan agreement.
40-Year Mortgages Can Help You Hang on to Your Home
Financial troubles you have had in recent years may make it impossible for you to meet the monthly payments for your current mortgage. Because of that, you are at serious risk of losing your home.
Modifying the terms of your loan and turning it into a 40-year mortgage can give you the breathing room you need. In addition, lowering your monthly obligations by hundreds of dollars may help you consistently make payments.
What Are the Disadvantages of a 40-Year Mortgage?
We are done talking about the advantages of a 40-year mortgage. For this next section, let’s mention why making this type of commitment can be risky.
40-Year Mortgages Are More Expensive
You are taking on potentially higher rates and significantly larger debt in exchange for lower monthly payments. By choosing a 40-year mortgage, you may pay more than double what you would have owed on a 15-year home loan.
Are the lower monthly payments worth such a massive debt increase? That is a question only you can answer. Nevertheless, it is important to recognize what you are getting into by opting for that 40-year mortgage.
40-Year Mortgages May Come with Balloon Payments
Remember, 40-year mortgages are regarded as non-qualified loans. That is important to note because non-qualified loans are not regulated as tightly as their qualified counterparts. As a result, lenders can include features in non-qualified loans that would not be allowed otherwise.
One of those features may be a balloon payment. Balloon payments are larger than regular payments. They usually tack it onto the end of a mortgage. According to the Consumer Financial Protection Bureau, a balloon is generally worth more than twice the amount of a monthly mortgage payment.
You know when a balloon payment is coming, but that does not make it any easier to pay if your finances are tight. Because that payment is so high, you may need to refinance your loan to deal with it. Some homeowners may even take out new loans to pay for their balloon payments.
If you would rather not deal with something like that while trying to pay for your home, you should probably avoid getting a 40-year mortgage.
40-Year Mortgages Take Longer to Qualify for Refinancing
Refinancing your mortgage unlocks certain benefits. Through refinancing, you can shorten the terms of your loan and snag a lower interest rate. If you have stuck with an adjustable-rate mortgage up to this point, you can switch it to a fixed-rate plan and vice versa. You can also cash out some of the equity you have built up in your home through refinancing and use that money to cover some expenses.
Thankfully, refinancing is still an option with a 40-year mortgage. However, your 40-year mortgage can make qualifying for refinancing a greater challenge.
In most cases, you must build up a certain amount of equity in your home before you can refinance your mortgage. The threshold may vary from one mortgage to the next. Still, lenders are generally okay with refinancing after you have built up at least 20% of equity.
Getting to that 20% mark takes longer if your mortgage runs for 40 years. You may be unable to secure that better interest rate for your loan because you lack the equity required for refinancing. Forget about refinancing for a while if you want to take out a 40-year mortgage on your home.
How Can You Lower Your Monthly Payments without Securing a 40-Year Mortgage?
You like the low monthly payments of 40-year mortgages, but the drawbacks attached to them are too significant for you to ignore. What are your options then if you want lower mortgage payments?
For starters, you can hold off signing a mortgage until you can make a bigger down payment. You can also pay for mortgage points. Mortgage points are available during the closing, and you can purchase them to lower your interest rate.
Sticking to a 30-year mortgage could also work out for you in the long term. After building up enough equity in your home, consider refinancing your 30-year loan to secure a lower interest rate. In the long run, you can save significant money by choosing a more conventional 30-year loan over a 40-year mortgage.
Are you looking to purchase a new home in Rhode Island using a 40-year mortgage or a different type of loan? If so, we at the RI Home Store can help guide you through that process. Contact us today and tell us about your preferences, and we will present you with the best listings!