In many cases, borrowers do not know what a 40-year mortgage is and if it really benefits them to request one from a lender.
For this reason, we have prepared this article to explain this topic in detail. However, if you require personalized advice with your situation, do not hesitate to contact our acclaimed New Jersey real estate attorney.
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Definition, Pros And Cons Of A 40-Year Mortgage In The United States In 2023
A 40-year mortgage is a type of home loan in the United States that allows a loan for a term of 40 years. This means that if this mortgage is fully maintained, it will take the borrower to make a total of 480 monthly payments.
In general, mortgages come in loans that are usually between 8 and 30 years. However, with a 40-year mortgage, it means it will take 40 years to pay off a property, unless amortizations are made in order to pay it off sooner.
It should be noted that like other mortgages, this one will be paid with monthly payments that include interest. Although this type of loan can bring advantages, it also brings with it a challenge when applying for it.
Advantages Of A 40-Year Mortgage
1# Lower Monthly Payments
Possibly one of the main attractions of a 40-year mortgage is that it has a very long period of time. Because of this, it gives individuals the opportunity to make much lower monthly payments.
2# There Is A Greater Opportunity For Short-Term Savings
Due to the long repayment period on this loan, homeowners who are struggling to make their payments may have opportunities to save more while they work.
3# There Are Alternative Loan Structures
These mortgages often come with an interest-only portion at the beginning of the loan.
For example, interest payments may only be due for the first 10 years, while principal and interest payments are made for the last 30 years.
4# Greater Flexibility
It is possible that if an individual is looking to pay off high interest debt, they may be able to make the interest payment only at the beginning of the mortgage. Later, if they have extra money, they can pay the principal so that when the loan is paid off with the full payment, their payment will be less.
5# Possibility Of Extra Payments
Generally, there is nothing to indicate that it will take an individual 40 years to repay this loan, since you can put extra money into your payment. By doing this, you could save on interest and pay off the mortgage sooner.
Disadvantages Of A 40-Year Mortgage
1# It Is A Non-Qualified Mortgage Loan
Some qualified mortgages can be purchased by mortgage investors, but are limited by certain legal regulations. However, 40-year mortgages are not. Besides:
- Care should be taken with balloon payments. These payments are often made by refinancing, but it can be difficult if you don’t have good equity or interest rates go up.
- Closing costs can be high. For example, closing costs on a New Jersey home for unqualified mortgages may be slightly higher than qualified mortgages.
- There is a possibility of negative amortization. Because of this, a minimum payment must be made every month, without getting any closer to paying off the loan. The only way to repay the loan, for example, is to sell a house in New Jersey and trust that its value will continue to rise.
In some scenarios, a denied mortgage loan may be present at closing. To avoid this, do not hesitate to contact us beforehand so that we can successfully guide you through the necessary steps to apply for a real estate loan.
2# Payments Are Long-Term
Despite lower monthly payments, the life of the loan itself is long. This leads to interest accruing, which can make the loan more expensive in the end.
3# It Has Higher Interest Rates
Depending on the lender the borrower has chosen, a 40-year mortgage could have a much higher interest rate. This means that the loan could end up costing more in the long run.
Similarly, the amount of money the borrower is willing to pay for their down payment could also affect the interest rate the lender offered.
4# Capital Can Accumulate Slowly
It is important for borrowers to examine what type of loan will help them build home value faster. For example, on 40-year loans, much of the payment goes toward interest instead of principal. Therefore, capital will accumulate slowly. It must be taken into account that:
- Often when a mortgage pays off, the borrower will gain home equity with each payment made on the loan. For this reason, it is crucial to create equity, since it brings desirable effects to the property.
- There must be a minimum amount of principal before refinancing, either to lower the rate or change the term. Also, you must have at least 20% equity before withdrawing money in cash, unless you have a VA loan.
- Typically, an individual is expected to have at least 22.21% equity in their home with a 40-year loan.
If you want to learn more about the requirements to apply for a mortgage in New Jersey or read the best tips for applying for a mortgage, you will find information about it in our blog.
How Does A 40-Year Mortgage Work?
The way a 40-year mortgage works is simple, as it can be stated as:
- A fixed-rate mortgage: Where all your payments will stay the same every month before homeowners insurance and taxes are accounted for, or
- An Adjustable Rate Mortgage (ARM): Where the interest rate can change periodically over the life of the loan.
There are also mortgages with a single interest period and mortgages with a balloon payment. In the latter, the borrower benefits from low payments in the first part of the loan term, but then must make a balloon payment when the mortgage is due.
While a 40-year loan can be refinanced to another term at a later date, such terms may appeal to certain individuals since their monthly payments are often low. Depending on the type of lender, you may qualify for a lower down payment.
What Types Of Lenders Offer A 40-Year Mortgage?
Since these types of mortgages are not backed by traditional parties, they may only be available through portfolio lenders.
Portfolio loans are all those loans that are held by the lender until they are paid off, instead of being sold to an investor.
Nowadays, not many offer loans of this type, since they seek greater liquidity. The vast majority of loans are sold immediately to one of the investors. However, it is possible to find a 4-year mortgage in:
- Local banks.
- Credit cooperatives.
- Private lenders.
- Mortgage Brokers.
- Some online lenders.
As we have seen, there are several types of lenders that can offer this credit. But what happens if I lose my job before closing on a mortgage? In our blog you will find the answer.
How Can You Get A 40-Year Mortgage?
Some of the most common ways in which you can get a 40-year loan are:
When Buying A Home
When buying a home, it is possible to apply for a 40-year loan if a lender that offers it is available. In fact, there is a chance that in certain real estate markets, you may not be able to afford a house if you have a short-term mortgage.
This is because the monthly payment will be very high since the loan is short-term. For example, in loans with a 15-year fixed rate.
Since the 40-year loan extends an individual’s payments, the individual will have more time to repay the loan, leading to a reduction in monthly payments. However, it must be taken into account that:
- Monthly payments will be lower with a 40-year home loan, but the price of the property you are about to buy will not go down.
- With a long-term loan, you will have to pay more in interest. Also, it will take longer to accumulate capital.
- In general, this type of real estate credit can be a great challenge if you want to sell a home or refinance it.
- If you don’t have enough capital, you may not make much of a profit when you sell it.
- If you do not have at least 20% equity in the property, there is a possibility that you will not be able to refinance it.
If this is your first time buying a home or you are looking for more information on the subject, check out our article: “What I need to buy a house in NJ”.
By Refinancing A Short-Term Mortgage
It is possible by refinancing a short-term mortgage to a 40-year loan. This is often very helpful for individuals who are having difficulty paying their mortgage each month.
By refinancing your mortgage to a longer term, you could reduce your monthly payments to one that is more affordable for you. If the loan term is less than 30 years, it could also be refinanced to a 30-year fixed rate loan.
If finances improve for the individual, they may be able to refinance back into a short-term loan, which would reduce the amount of interest to be paid. However, when it comes to taking these measures, it is best to speak with our attorney Carolina T. Curbelo.
Our attorney will be able to help you with everything you need to successfully navigate this world of real estate. In addition, talk to our NJ foreclosure lawyer ready to serve your requirements.
Steps To Obtain A 40-Year Mortgage
In general, the steps to obtain a 40-year loan are similar to those for any other type of mortgage loan. These are:
1# Request An Initial Approval
Before beginning their dream home search, individuals must get pre-approved for a 40-year home loan. During this process, the lender will review the applicant’s credit score and income.
Generally, the lender will evaluate the following documents:
- Copies of the most recent pay stubs.
- Last 2 months of the bank account.
- Last 2 years of IRS Forms W-2 and tax returns.
Once all this has been analyzed, the lender will use these documents to verify the individual’s monthly income and determine how much they must pay on their mortgage.
2# Show The Pre-Approval Letter To The Real Estate Agent
The lender must provide a pre-approval letter to the borrower. This letter will indicate that the borrower has been approved for financing and the amount of credit available for which he has qualified.
Once the borrower has this letter, they just need to show it to their real estate agent. This way, them and their agent won’t waste time searching for an off-budget home.
Additionally, if you get into a bidding conflict with other home buyers, the pre-approval letter could give you the opportunity to be a more attractive buyer.
3# Get An Offer
After finding an ideal house among the different types of houses in New Jersey, for example, it was time to make an offer. In general, sellers will only be able to do 3 things with the offer:
- Accept it.
- Reject it, or
- Counter offer
The real estate agent or lawyer will handle these negotiations until the buyer and seller reach an agreement or not. If the seller approves the offer, it is possible to move towards closing with a 40-year home loan.
4# Complete The Mortgage Application
When a contract has already been agreed, it is time to carry out the credit closing process. To do this, it is required to go through the following guidelines:
The home appraisal in New Jersey is a fundamental part of the mortgage process, since it is required by the lender. During an appraisal, the appraiser will visit the property to determine how much it is worth.
It is crucial that the house is worth as much as the price that is being paid for it. Otherwise, the sale could fail, since the lender will not lend more than the house is worth.
Although a New Jersey home inspection is not required, it is highly recommended. During an inspection, a qualified inspector will walk through the entire house that you want to buy.
This will look for possible problems in the structure of the house and will make a report detailing those problems.
Additional Financial Documents
Borrowers must provide lenders with all necessary key documents that prove their income. Some lenders may not be very compliant and will require more supporting documents.
Lenders who make 40-year mortgages will often have their own documentation requirements. However, generally a FICO® credit score check of at least 640 is usually sufficient for this loan.
The lender will order a New Jersey property title search for the home you want to buy. Said search will be designed to discover all types of claims or encumbrances on the home that owns the real estate title.
A common example of this is if the sellers of the property missed certain property tax payments, the county could have a claim against them.
If the sellers or buyers do not pay the taxes owed, the county can take possession of the property, even after the buyer has purchased it.
To learn about this in more detail, you may be interested in reading our article on the marketable title in real estate.
What Differences Exist Between A 30-Year Mortgage And A 40-Year Mortgage?
Some of the most notable differences between these mortgages are:
- The 40-year payment should be cheaper.
- More interest is usually paid over 40 years.
- The 30-year interest rate is usually lower.
- The term of a 40-year loan is longer.
Deciding between a 30-year or 40-year mortgage loan will depend more than anything on the financial position in which the borrower can pay. In general, with 30-year credit, principal will accumulate faster as the debt is paid off.
Alternatives To 40-Year Mortgages
There are certain alternatives available for those individuals who do not wish to opt for this type of loan. In addition to a conventional 30-year mortgage, other possible options include:
- VA Loans.
- Federal Housing Administration (FHA) loans.
- US Department of Agriculture (USDA) loans.
- Discount points.
Now, what if you are a freelancer? Will you be able to apply for a mortgage? You can get more information about this in our post: Self-employed mortgage loans.
Why Do I Need Help From A New Jersey Real Estate Law Firm For A 40-Year Mortgage?
Now that you know what a 40-year mortgage is, you have been able to verify that a loan of these characteristics can offer the benefit of having a low monthly payment, since it is a long-term loan. Because of this, you’ll also have more flexibility than other types of mortgages.
As if that were not enough, you may only have to pay interest for a certain period of time. However, this depends on the terms set out in the contract.
Although everything seems beneficial, this type of mortgage usually requires a higher interest payment and the equity of the property will accumulate much slower. In addition, this loan can have high costs and other negative aspects to consider.
For this reason, we encourage our clients to contact our law firm for advice on this type of loan according to their scenario. At Curbelo Law, you will find a staff trained to help you solve your legal needs.