You can get a 40 year mortgage! (And we have them at Newfi.)

But it’s important to understand the advantages and disadvantages of 40 year mortgages before you consider one.

First, it’s important to understand that there are two main types of 40 year mortgage available:

  1. Fully amortizing. With a fully amortizing 40 year mortgage, every payment you make goes to some amount of both interest and principal for your loan. Assuming you have a fixed rate, your rate and combined principal and interest payment will not change for the life of the loan.
  2. Interest only. With an interest only mortgage, there is a fixed period during which your payments are going only to interest — you are NOT paying down your loan’s principal. This period is usually 5 to 10 years, during which your payment is lower than usual. Once this period is over, you transition to a regular, fully amortizing mortgage where you pay both interest and principal each month. Since you are now paying principal in addition to interest, your total payment goes up. Assuming your interest rate is fixed, however, your rate and payment will not change after that.

At Newfi, we offer a 40 year fixed-rate mortgage with a 10 year interest only period. This means that for 10 years you pay only interest, after which your mortgage turns into a typical 30 year fixed mortgage. As a result, payments look something like this:

You can create this payment schedule for yourself using our interest only mortgage calculator.

When we discuss advantages and disadvantages of a 40 year mortgage in this article, we’ll be focusing on an interest only type of mortgage, since it differs significantly from a typical 30 year fixed rate mortgage.

What are the advantages of a 40 year mortgage?

There are three main benefits to a 40 year fixed mortgage with an interest only period over a standard, 30 year fixed mortgage:

  • Very low payments during the interest only period. For the the first 10 years (or fewer, if you decide to end the interest only period early), your payments are lower than what your payment would be for a fully amortizing loan.
  • Fixed interest rate. Interest rates are now quite low by historical standards. With a fixed-rate mortgage loan, you lock those rates in for 40 years!
  • Very long payment term. 40 years is obviously 10 years longer than your standard 30.

Because of the low initial payment period, this type of mortgage may make sense for those who expect their income to rise before the fully amortizing period begins, or those who plan to refinance before the end of the interest only period.

What are the disadvantages of a 40 year mortgage?

There are some drawbacks to the 40 year mortgage as well:

  • You’ll pay more interest over the life of the loan, compared to shorter-term loans like the 30 year fixed or 15 year fixed. This is because you’re not addressing the principal until later in the loan period.
  • Higher rates. 40 year mortgage interest rates may be higher than those of a conventional, 30 year fixed-rate loan.
  • Possible “payment shock” when the interest only period ends and your monthly mortgage payments go up.
  • You build up equity more slowly, since all your early payments go to interest.
  • Favorable refinancing may be difficult because you won’t build equity during the interest only period, and rates may go up from current historically low rates.

So there’s a lot to think about when considering a 40 year mortgage. We recommend you talk to us Newfi. We can get you a 40 year mortgage rate quote and help you compare it to your other mortgage options. You can call us at 888-316-3934 or use our contact form.

About the Author

Daniel Silver

Daniel Silver is the Vice President of Marketing at Newfi Lending.