40-Year Mortgages and What You Need to Know
40-year mortgages can be appealing because although they take longer to pay off than traditional loans, that means a lower monthly payment and possibly even a lower down payment.
There are a few downsides to this type of mortgage though. To start, they are not qualified mortgages - a mortgage that can be bought by the major mortgage investors. This basically means they are not regulated in the same manner as traditional loans that are qualified mortgages. it is important to understand what type of 40-Year Mortgage you are taking out: are there interest-only payment periods, you could experience negative amortization, this mortgage may not have limits on closing costs, and you may experience balloon payments.
Let's dive into what each of those mean:
Interest-only payment periods: if you are only payment the interest amount, you're not making payments towards the principle loan amount. This means you aren’t actually paying off the loan.
Negative amortization: this is when you are only paying minimum payments each month so the loan will be nearly impossible to pay off. The only way you can pay off the loan is by selling the property. This would be okay if you knew housing prices will keep going up and you did not plan to stay in the home long term.
Closing cost limits: traditional qualified mortgages have limits on the closing costs. 40-Year mortgages may not, which means your closing costs could end up being much higher than you originally planned for.
Balloon payments: This occurs when negative amortization is happening. You may be expected to put a large lump sum towards your loan. A lot of borrows refinance their home to do this, but if you don’t have a lot of equity in your home and property values aren’t rapidly rising, you may not qualify for refinancing.
With the upcoming forbearance due to Covid-19 related job loss and health issues, Ginnie Mae recently announced that it would allow eligible borrowers to avoid forbearance with a loan modification up to 40 years. As a major mortgage lender, Ginnie Mae backs loans made through the Federal Housing Administration (FHA), The U.S. Department of Veterans Affairs (VA), the Department of Agriculture (USDA), and the Office of Public and Indian Housing (PIH). If you are close to forbearance on your loan with any of these organizations supported by Ginnie Mae and do not qualify for refinancing, you may be eligible for a 40-year loan modification.
Is a 40-year mortgage right for you?
Paying off your loan over 40 years does mean you’d pay quite a bit more in interest over those 40 years. If you’re okay with paying more interest to keep your monthly payments low, this could be right for you. If you prefer to pay less total interest, we recommend avoiding longer term loans.
You’re not in it for the equity. With a 40-year mortgage, equity builds a lot slower than with shorter term loans since you are paying less towards the principle loan.
You are desperate to keep your home and are nearing forbearance.