Most mortgage terms are 15 or 30 years. However, some homeowners who are struggling with payments may seek home loan modifications that offer 40-year terms.
Is a 40-year mortgage a good idea?
What is a 40-year mortgage?
A 40-year mortgage is a mortgage that borrowers make payments on for 40 years. This type of loan was more common before the 2008 financial crisis involving subprime mortgages. Today, it is mostly available as a loan modification.
What are the advantages and disadvantages of a 40-year mortgage?
Most people who seek 40-year mortgages have a 30-year mortgage that they want to modify. Extending the terms from 30 years to 40 may result in lower monthly payments. This may provide people who are struggling to pay their debt an opportunity to catch up.
However, borrowers pay more total interest over the life of a 40-year mortgage. They also build equity more slowly. 40-year mortgages are nonqualified mortgages which means they do not meet the Consumer Financial Protection Bureau’s requirements. Non-qualified mortgages may come with riskier terms than qualified mortgages, such as interest-only payment periods, negative amortization and balloon payments.
Is a 40-year mortgage a good idea?
A 40-year mortgage may be a worthwhile option for homeowners who are at risk of losing their homes because they can not make the payments on their existing mortgage. However, the terms of the loan may put borrowers under increased financial stress long-term due to the higher overall cost and riskier terms.
Borrowers who are considering loan modifications should also consider other debt reduction strategies, such as bankruptcy, credit counseling or other methods of foreclosure prevention before making their decision.
