I’ve heard that a 40-year home loan can help lower monthly payments and make buying a home more affordable — who offers 40-year mortgages?

Chris, MMI Reader

Longer term financing is still available, despite falling out of favor after the housing crash 10 years ago. But, finding a lender that offers a 40-year mortgage lender can be difficult.

The real question: Should you get a 40-year loan in the first place?

A closer look at 40-year mortgage costs

For many borrowers, the biggest barrier to homeownership is affordability — and, your monthly mortgage payment is your first hurdle. All lenders have standards to borrow that every borrower must meet. One of those standards is your debt-to-income ratio (or, DTI), which generally can’t exceed 43%. Large monthly mortgage payments can push borrowers past DTI limits, which can result in declined loan applications.

This makes 40-year mortgages attractive for some. Longer loan terms equal smaller monthly costs. With less owed each month, some borrowers can more easily afford financing and in some cases may qualify for larger loan amounts.

But, for a better comparison, we need to look beyond just monthly payments — interest costs and amortization are also important cost considerations when evaluating which loan is right for you.

Comparing 15-, 30-, and 40-year Mortgages: A Breakdown of Costs*

*Monthly payments and potential interest costs are based on a $200,000 home loan with a fixed rate of 4.875%.

Things to consider when comparing costs for 40-year mortgages:

• Lower monthly payments. While it’s true that your monthly payment will be lower with a 40-year mortgage, it likely won’t be by much. In the illustration above, there’s only a $110 monthly savings between a 30-year home loan versus a 40-year. This small monthly savings may not be worth the other long-term loan costs.
• Higher interest rates. The interest rate that you qualify for will depend on a variety of factors, including your credit score and credit history. However, lenders who offer longer term loans typically charge a higher interest rate than loans with 15- or 30-year terms.
• Higher interest costs. The longer the loan term, the more you’ll spend in interest costs over the life of the loan. The 40-year loan has the highest potential interest costs (more than three times the amount of a 15-year loan and around $74,000 more for the 30-year) in the example above — and that’s assuming the same interest rate; in reality, it’s likely to be higher.
• Takes longer to build equity. You’ll essentially be making 10 extra years of interest payments with a 40-year mortgage, which means that you’ll build up equity at a much slower rate than a 15- or 30-year mortgage. This is particularly important for homebuyers who don’t plan to be in the home for the entire 40 years, which is increasingly common. In 2018, the average home was owned for only nine years according to the National Association of Realtors.

Who offers 40-year mortgages?

Since it’s easier to qualify for a 40-year mortgage in terms of DTI, you might expect that they are easy to find, but this isn’t the case. Many lenders don’t offer them at all.

Federal rules say lenders can offer two types of residential financing, “qualified mortgages” (QMs) and “non-qualified mortgages” (non-QMs). Qualified mortgages include FHA, VA, and conventional loans that can be purchased by Fannie Mae and Freddie Mac.

What makes a qualified mortgage?

To be considered a “qualifying mortgage,” a loan must comply with the Consumer Financial Protection Bureau’s (CFPB) product feature requirements. One of these primary requirements is a maximum loan term of no more than 30 years.

Even if a loan is not a qualified mortgage, it can still be an appropriate loan. Lenders are free to originate mortgages — QM or not — based on their own criteria, or what the CFPB calls “sound, tested underwriting guidelines that you have used in the past to make loans that have generally performed well.”

“Consumers should understand that every loan made today is subject to the ability-to-repay rule; non-QM loans just have a different way to get there,” says Mike Frantontoni, chief economist with the Mortgage Bankers Association.

Still, lenders prefer to originate QM loans because they’re safe. Dodd-Frank protects lenders who properly originate QM loans from lawsuits by borrowers, insurers, and investors. As a result, 97% of originated loans are qualified mortgages and non-QM loans — a category that includes 40-year mortgages by definition — are difficult to find.

To find a 40-year mortgage lender look for lenders who offer non-QM financing such as jumbo mortgages. Be sure to speak with several loan officers to see how rates and terms compare.

40-year mortgage rates

It used to be that jumbo loans, as one type of non-QM mortgage, were more expensive than other forms of financing. That has changed. Today, jumbo loans are comparable to FHA or 30-year conventional mortgages.

Rates vary and fluctuate daily — it’s important to shop around to get the best deal. Look for lenders who offer non-QM financing such as jumbo mortgages. Compare rates and terms carefully, and get the financing that works best for you.