A 40 year mortgage is a mortgage loan that is structured to be repaid over a 40 year period. The conventional mortgage repayment is 30 years. With a 40 year mortgage, the monthly payments are much lower. While a 40 year mortgage is obviously more affordable to a borrower when one is paying much lower monthly payments, such a long-term loan typically come at high interest rates and will eventually cost you more over the loan lifetime.

Basically, this is how it works. If you borrow $100,000 with a 30-year term at 5 percent interest rate, monthly payments will be $536. On the other hand if you borrowed the same amount at the same rate with a 40-year term, your payments would total to only $482, saving you $54 per month. This is a very good deal and if you find a lender offering such terms, you are wise to take it. However, in most cases, lenders charge a higher rate on 40 year mortgage loans due to their perceived higher risk. Now let us do the calculation again, this time with a 5.25 percent rate over a 40 year term on the same amount. The monthly payments will be $499. While the high interest rate will have reduced your savings, you will still be able to save $37 per month.

Most 40 year mortgage loans have a fixed interest rate for the entire loan period. However, you may still find loans that have fixed rate for five or ten years after which the rate is converted to a variable rate. A 40 year mortgage makes good sense to those who need to qualify for a larger loan amount at a lower payment and who also want the lowest possible payment for the longest time possible. A 40 year mortgage pays down the principal over time, unlike an interest-only loan. The only difference with a 30 year mortgage is that the principal to be paid off is less. A 40 year mortgage is also flexible. This means that one can still make extra payments to quickly pay off the loan and you do not need to be locked into the 40 year period. As one economist put it, “You cannot make it longer, but you can certainly make it shorter.” Most homeowners who cannot afford mortgage payments are usually offered 40-year terms as part of a loan modification agreement. If they can afford to make payments, the modified loan is sustainable.

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