A 40 year mortgage, with either fixed or adjustable rates, is starting to receive more recognition in the mortgage business. With interest rates rising and real estate prices booming in the last year, lenders are starting to offer the 40 year mortgage as a viable option for buying your dream home.

Although the 40 year mortgage has been around since the 1980s, it only made up for a very small percentage of mortgage loans, less than 1% at most times. Now with higher interest rates, borrowers are looking for a way to save a little money with lower monthly payments. With rising interest rates, the 40 year mortgage gives buyers the opportunity to still buy the home they want and receive a lower payment, but borrowers will still being paying in the long run.

The interest rate of this longer loan may not be drastically different from the interest rates of a 30-year mortgage but adding ten extra years onto the life of the loan will inevitably increase the costs. This means a customer needs to be careful about choosing a 40-year mortgage because often the first few years of a mortgage are just covering the interest and not even impacting the principal of the mortgage.

Not all mortgage lenders are offering a straightforward 40-year loan, although many can and will still offer something that resembles that loan. Many lenders do this by offering a 40-year amortization on adjustable-rate mortgages, or ARMs. Here, a customer would start out with something like a 5/1 adjustable rate mortgage (ARM), beginning with five years of fixed rates and 35 years of annual rate adjustments. Since many lenders do not offer a straightforward loan for 40-years, if you are interested in stretching out your payments to 40-years, ask about the amortization of a loan to 40-years.

For those that aren’t interested in putting that many years into a mortgage or in a 40-year amortization, many are beginning to also consider a combination of other ARMs and interest-only mortgages. These mortgages are currently making up 2/3 of the mortgage originations and continue to increase as interest rates increase. These loans are often referred to as option ARMs, or short-term ARMs that start out with introductory rates of as low as 1%, but give buyers a variety of mortgage payment options. This is another option for borrowers to purchase a more costly home with the high interest rates.

Other efforts to help with rising interest rates has also produced 30-year fixed rate mortgages that lets borrowers pay low, interest-only payments for the first 10-15 years of the loan. The main purpose of a 30-year mortgage paying interest only for the first 10-15 years would be a low payment. The function is very similar to the forty-year loan but may keep the buyer’s interest rates from increasing on the loan. 

For the special 30 year fixed rate loan mentioned earlier, the interest only period would last the first 10-15 years and then the interest would continue through the rest of the loan but the loan payment would adjust to include principal payments for the remaining years of the mortgage. This mortgage option may be intriguing to young couples, first time homebuyers, or those with bad credit to give them an opportunity to get on their feet, paying a lower monthly payment for the first ten or fifteen years, but then assuming they will be more established and capable of paying a higher monthly payment later on in life.

Other mortgage options that are being offered by mortgage lenders include a 20-20 mortgage, where the interest rates would adjust after the first 20 years. This is similar to the 30-year mortgage but still gives borrowers the option to spread their payments out over 40 years, but not to be stuck paying the same high interest rate over the entire 40 years.

Another reason many borrowers are considering, and lenders are offering a 40 year mortgage is so that buyers can spend more money while purchasing a home. By stretching out the mortgage from thirty to 40 years, there is still the possibility of purchasing the home of your dreams.

The 40 year mortgage is also good for first time homebuyers or those who need extra help, like young couples or those with bad credit. This will give those homebuyers a chance to still invest in a home but without a high monthly payment. They need to keep in mind, though, that the disadvantage of this forty year mortgage is a higher interest rate in the long run. It also takes longer to build up the equity on the home because the borrower is further stretching out paying on the principal of the loan, which builds equity on a home.

Many companies are still finding that there is not enough interest in the 40 year mortgage to sustain offering them through the lending company, but this may change since Fannie Mae recently announced that they would begin purchasing these loans. In September 2003, with a pilot program of 22 credit unions, Fannie Mae offered to buy back both fixed and adjustable rate loans and will soon expand the pilot program to many other financial institutions. This may pique the interest of other institutions to begin offering a 40 year mortgage.

Whatever the case, lenders are trying to come up with a variety of different options for their borrowers so they do not lose business in the age of rising interest rates. Many customers see these options with a lower monthly payment and don’t see what the disadvantages may mean in the long run. If you are interested in one of these options be sure to cover all the bases with your mortgage lender. Before choosing a 40 year mortgage, ask your lender to compare a 30-year mortgage to a 40 year mortgage and give you details regarding the differences in interest over that ten year period as well as the final tally of how much more you will pay total for the home you want to purchase.

For borrowers who don’t have many options, consider starting with a 40 year mortgage and then refinancing down the road. If you don’t refinance the loan there is always the option to send in pre-payments as your salary increases.

Some experts also suggest for those in the high-income bracket to take a look at the 40-year mortgage because often the only tax break available to those in a high-income bracket would be the interest. The extra interest accrued on a 40-year loan may be helpful.

Most experts are also noting that these lengthier mortgages are not good for older couples or an older person seeking to invest in a home because it will take too long to build up that equity and the person could be paying for the home into their seventies or eighties. The retired person may not have the income to sustain paying a mortgage.

The bottom line is that there are a variety of options for homebuyers and those options need to be taken into consideration before deciding on the mortgage that best suits you. These new mortgage options also open up the market to a range of new borrowers so this could always fuel even higher prices in the real estate market. As well, a 40-year mortgage is not the best option for everyone but there are viable alternatives that can help you attain the home you want. Be sure you are aware of the advantages and disadvantages and always consider your options for refinancing down the road.