Considering a 40-Year Mortgage? You Could Pay Hundreds of Thousands More in Interest

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Lower monthly payments might sound nice, but getting a 40-year mortgage could be a costly mistake in the long run. Here’s why. 

With home prices and interest rates skyrocketing, it can be tempting to consider lowering your monthly payment by stretching out your mortgage by another decade. However, there are some serious drawbacks to consider before going all-in on a 40-year loan. Read on to learn more about one alternative to a traditional 30-year mortgage — and why it isn’t as popular.

What is a 40-year mortgage?

While most Americans are familiar with a 30-year mortgage, other types of home loans exist with a variety of features. Generally, a 40-year mortgage acts in the same way as a conventional mortgage, offering a fixed interest rate over a certain number of years.

Fixed-rate mortgages are generally fully amortized, meaning that interest and principal payments are baked into the monthly payment. At the end of the term, the debt is paid off in full, assuming regular payments are made in full and on time.

The difference between a 30- and 40-year mortgage is the term. A borrower with a 30-year loan is on the hook for 360 monthly payments before they’ll pay off the debt. Meanwhile, a 40-year mortgage will require a borrower to pay for another decade. As we’ll see, that longer term can have a significant impact.

What are the pros?

Today’s home buyers are facing a tough real estate market. Staunch competition is bidding up the price on limited inventory. Meanwhile, climbing interest rates are shackling some prospective buyers with golden handcuffs.

Some buyers are using 40-year mortgages to try and stretch their mortgage budget. At first glance, this makes perfect sense: paying down a mortgage over a longer period would naturally lower your monthly payment. A lower monthly payment could mean qualifying to buy a house big enough for the entire family or moving into a better school district, but over the long term, there are some serious drawbacks.

What are the cons?

A longer term on your mortgage may mean lower monthly payments, but it also means that you’ll be accruing interest for another decade. And while lower payments may offer short-term relief from high rates, those rates get their revenge in the long term.

Using a mortgage calculator, the difference between a 30- and 40-year mortgage becomes clear. Assume you are buying a $500,000 home with 20% down at a 7% interest rate. If you opt for a 30-year mortgage, you’ll pay $2,661 each month. Meanwhile, with a 40-year mortgage, you’ll pay $2,485 — a savings of $176 every month. The price of those monthly savings, however, is high. Over the life of the mortgage, you would pay nearly $250,000 more in interest by taking a 40-year mortgage over a 30-year mortgage.

How you can make a home purchase more affordable

There are a few steps you can take to make the payments on a 30-year mortgage more feasible for your budget, despite the current housing market crunch. Consider eliminating PMI (private mortgage insurance) by making at least a 20% down payment. Shop around for homeowners insurance, and consider appealing your property taxes if you feel they were assessed unfairly. And you may want to steer clear of a 40-year mortgage — especially in today’s interest rate environment.

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