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Mortgages

What is a 40-year loan and how does it work?

40-year loans have smaller monthly payments but can end up costing more in the long run.

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Witthaya Prasongsin | Moment | Getty Images

The offer of a lower monthly mortgage payment would tempt any homeowner, and that's exactly what a 40-year mortgage promises. By tacking on an extra decade to the standard 30-year mortgage, this loan type leads to lower monthly payments because you have more time to pay off the loan. But the amount of interest you'll pay over the loan's lifetime makes a 40-year mortgage a bad choice unless you're otherwise at risk of defaulting on your existing mortgage.

If you've heard about a 40-year mortgage and are wondering if it can help you afford a home, here's what you need to be aware of first.

Why most homeowners should stay clear of a 40-year mortgage

For borrowers looking to buy a home, a 40-year loan isn't a good option because the savings won't always outweigh the risks. "Frankly, I can't imagine a situation where on a purchase I would recommend somebody doing that," says Elizabeth Rose, a certified mortgage planner and loan originator with 26+ years of experience in the mortgage industry.

Let's use a $350,000 home purchase with a 20% down payment ($70,000) as an example of why the lower monthly payment isn't worth taking on this loan type.

In that scenario, the buyer needs a $280,000 mortgage. For a 30-year loan at 6.85%, the total interest the borrower pays over the life of the loan would be $380,501. That number jumps by over $174,000 to $555,204 with a 40-year loan at 7%. The 40-year loan does have a smaller monthly payment and would save the borrower $95 a month, but you're paying almost $175,000 more in interest.

You'll also build equity in your home much more slowly with a 40-year loan. Using the numbers from the example above, the remaining balance on the 30-year loan would be just under $240,000 after making regular payments for 10 years. With the 40-year loan, the borrower would have a balance of over $261,000 after 10 years.

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Alternatives to a 40-year loan

Nobody wants to pay a higher monthly mortgage payment than they have to, and getting a good deal from a lender you trust is crucial to keeping those payments manageable. That's why you should always talk to different lenders when shopping for a mortgage before committing to a loan. Some of the best lenders for first-time homebuyers according to CNBC Select include PNC Bank, which offers a wide variety of loans that can suit just about any need, and Ally Bank, which doesn't charge any lender fees.

PNC Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan

  • Terms

    10 – 30 years

  • Credit needed

    620

  • Minimum down payment

    0% if moving forward with a USDA loan

Terms apply.

Ally Home

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, HomeReady loan and Jumbo loans

  • Terms

    15 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3% if moving forward with a HomeReady loan

Terms apply.

Is there any reason to get a 40-year loan?

While it's difficult to think of a scenario where you would want a 40-year loan to purchase a new house, the lower monthly payments offered by this loan type could help people having trouble making payments on their existing mortgages.

The Federal Housing Administration, for example, added an option for 40-year FHA loans in May 2023, but it's only available in specific circumstances. A borrower can only get this type of mortgage through a loan modification program. Homeowners with an FHA loan who are experiencing financial hardship and are unable to afford their current mortgage payment may be able to lower their monthly payment by extending their loan term to 40 years. This type of loan modification may also be an option if you have a conventional loan, which is a type of loan that's not backed by the government.

To see if you qualify for a loan modification, contact your loan servicer. "The sooner you reach out for help, the easier it is to get the help put in place," Rose says. Your loan servicer (the company you send your monthly payments to) can let you know how to proceed and what options are available for your situation.

Why 40-year loans are hard to find

Very few lenders offer this type of loan, mainly because they fail to meet the guidelines set by the Consumer Financial Protection Bureau (CFPB) for qualified loans. These rules prohibit riskier types of loans, including loans with repayment terms of more than 30 years.

Since 40-year loans don't meet the CFPB's guidelines, they can't be backed by the government (as opposed to VA loans, FHA loans, USDA loans) and these loans can't be sold by the lender to Fannie Mae or Freddie Mac. This makes 40-year mortgages riskier for lenders and potentially more expensive for borrowers.

Bottom line

Homeowners have a lot of options when it comes to purchasing a home, including getting a 40-year mortgage. However, very few lenders offer this type of loan. And although a 40-year loan has a smaller payment, it can cost more and you'll pay off the loan much more slowly. For these reasons, the drawbacks of a 40-year loan can outweigh the advantages.

However, in certain situations, a borrower may be able to modify their existing loan to a 40-year mortgage. If this type of modification can help a homeowner experiencing financial hardship keep their home, then it can make sense.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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