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What are the pros and cons of the new 40-year mortgage option?

By Alanna Schubach  | July 5, 2022 - 9:35AM

With a 40-year mortgage option, you will have lower monthly payments, but you also risk still having mortgage debt past retirement age. 


I recently read about a new 40-year mortgage that has smaller monthly payments. Is this a good option for a young, first-time buyer like me?

A 40-year mortgage means lower monthly payments, but it comes with certain drawbacks, including the risk of remaining in debt well into your retirement, our experts say.

Considering the increase in home prices since the onset of the pandemic, coupled with rising mortgage interest rates, it's no surprise that buyers are looking for ways to reduce housing costs. One option introduced in April by the Federal Housing Administration is a 40-year loan modification, which would allow mortgage borrowers to repay their loans over 480 months, instead of the 360 months of a traditional 30-year mortgage. 

Note that 40-year mortgages are portfolio loans, a type of non-conforming loan that is a good option if you have bad credit, are self-employed, looking to invest, or need more flexibility. But there are some cons you should be aware of.

"A 40-year mortgage may offer the benefit of a lower monthly payment because it’s a long-term loan; however, you’ll pay more in interest, and equity builds slower. This is harmful because equity gives you financing options," says Mary Alex Blanton, senior vice president at National Cooperative Bank (a Brick Underground sponsor). "As a first-time homebuyer, it would be good to look at traditional 30-year, fixed-rate loans or adjustable-rate loans that may offer a lower interest rate in today’s environment." 

On the other hand, a longer-term loan could make sense for young buyers who anticipate that their earning power will increase in the years to come. 

"For a first-time buyer, the hope is that as their income increases and rates shift, they can refinance down the line," says Deanna Kory, a broker with Corcoran. "It is important to make sure that if they get a 40-year mortgage, there is no pre-payment penalty so they can refinance should they want to, without having to pay a penalty."

Remember, she adds, that the costs of a 40-year loan will be ultimately be higher than those of a 30-year loan because you'll pay more in interest over the life of the mortgage. Consider how long you intend to stay in the home, and whether shortening the term of your loan will be feasible in the future.  

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Alanna Schubach

Contributing writer

Contributing editor Alanna Schubach has over a decade of experience as a New York City-based freelance journalist.

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