The Federal Housing Administration (FHA) approved 40-year mortgages in May 2022. This is a significant change from the traditional 30-year mortgage, and it has both pros and cons for potential borrowers.
Why was it approved?
The FHA approved 40-year mortgages in an effort to make homeownership more affordable for first-time buyers and those who are struggling to make their monthly payments. The longer term means that borrowers can pay less each month, even though they pay more over the course of the mortgage. Paying less initially can be helpful on a tight budget and many refinance or put more money into their principle over the course of their loan to ensure it’s paid off sooner. If anything, the 40-year loan ensures many homebuyers can get their foot in the door.
Pros of 40-year mortgages
There are several pros to 40-year mortgages. First, the monthly payments are lower than they would be with a shorter-term mortgage (e.g. 30-year fixed rate). This can be helpful for people struggling with the high monthly cost.
Second, 40-year mortgages can be a good option for borrowers who are not sure how long they will be staying in their home. A 30-year mortgage is a great option if you plan on staying in the home for at least half that time. If however, you’re looking to improve your equity, credit, and loan options in the relative short-term (say, 10 years), then a 40-year mortgage can save you money in the long run.
Cons of 40-year mortgages
There are plenty of cons to 40-year mortgages as well. First, the total interest paid over the life of the loan will be higher than it would be with a shorter-term mortgage. This is because you are paying interest on the loan for a longer period of time.
Second, 40-year mortgages are not as common as 30-year mortgages, so there may be fewer options to choose from.
Third, 40-year mortgages may have higher interest rates than 30-year mortgages. This is because lenders are taking on more risk by lending money for a longer period of time, especially considering 40 years is half a person’s lifespan.
Eligibility for the loans
The eligibility requirements for a 40-year mortgage are similar to those for a 30-year mortgage. You will need to have a good credit score, a stable income, and a down payment of at least 3.5%. You may also be required to purchase private mortgage insurance (PMI), which protects the lender in case you default on your loan.
Difference from adjustable rate mortgages (ARM)
A 40-year mortgage is a type of fixed-rate mortgage, which means that the interest rate will stay the same for the life of the loan. This is different from an adjustable-rate mortgage (ARM), in which the interest rate can change over time. ARMs typically have lower initial interest rates than fixed-rate mortgages, but the interest rate can go up over time, which could make your monthly payments more expensive.
Here are some things to consider when deciding whether a 40-year mortgage is right for you:
- Your income: If your income is not going to increase as much as interest rates are, a 40-year mortgage may be a good option for you.
- Your budget: If you can afford to make higher monthly payments, a shorter-term mortgage may be a better option.
- Your time horizon: If you are not sure how long you will be staying in your home, a 40-year mortgage may be a good option.
- Your risk tolerance: If you are not comfortable with the risk of rising interest rates, a 40-year mortgage may be a good option.
However, it is always important to compare the pros and cons with other types of mortgages before you decide if it is right for you.