Considering a 40-year mortgage? This extended loan term can lower your monthly payments, improve affordability, and offer more financial flexibility. But it comes at a cost. Is a 40-year term the right choice for you?
Everybody wants to save money on their monthly mortgage payment. Lenders, home builders and real estate agents are all trying to earn the business of the savvy homebuyer by trying all kinds of different strategies to make homeownership more affordable.
It’s important to keep in mind the difference between a more affordable mortgage over the life of the loan and a more affordable monthly mortgage payment. There are specific scenarios in which a 40-year mortgage becomes a viable option for some buyers, but it’s probably not the best fit for everyone.
A 40-year mortgage is a type of non-QM loan that simply extends the payment term from the traditional 15- or 30-year period to 40 years. When relatively high rates persist in the market, that extended payment term can provide lower monthly mortgage payments, which can make homeownership more accessible.
Let’s back up for a moment here, though. When we say a40-year loan term is a non-QM loan feature, let’s explain what non-QM means in the mortgage space. We recently wrote an explainer on the topic here, so go and read that piece if you’re interested in learning more.
Basically, non-QM mortgage loans are ones that don’t meet the Consumer Financial Protection Bureau’s (CFPB) requirements to be considered “qualified.” They fall outside the parameters of Conventional loans or government-backed loans such as VA, USDA or FHA loans. That’s because those more typical mortgages require the homebuyer’s income to be documented in certain ways — mainly through tax returns and W-2s. Non-QM loans are aimed at borrowers whose financial profiles don’t meet the requirements of a typical qualified mortgage loan. However, just because a borrower has a unique income stream doesn’t mean they are more likely to default on their debts. Many times, these folks own their own business, invest in real estate or leverage large-scale assets to prove their ability to pay down their mortgage.
Existing outside the rules of qualification gives non-QM lenders like Fairway a lot of freedom, both in who they can approve for a mortgage and in the features of those loans. One of the additional features that can be applied to some types of non-QM loans is this extension of the loan term to 40 years instead of the typical 15 or 30. This is useful for borrowers whose income isn’t as predictable as a regularly scheduled paycheck twice a month and want the lower monthly payment that the 40-year schedule allows.
“Are these loans for everybody? No,” said Austin Smith, Fairway sales manager in Greenwood, IN. “But they could open a few more doors. And what we’re excited about with these loans is that it’s all part of Fairway’s effort to get to a yes with every potential homebuyer. We’re constantly trying to be more inclusive in the lending space, regardless of what you can show on a tax return. How can we build and scale additional opportunities for people to get what they hope and dream for? That’s the name of the game.”
As noted above, the 40-year mortgage term extends the traditional repayment period by 10 years, allowing the lender to lower the borrower’s monthly payments, but the cost is a higher mortgage rate and more interest paid over the life of the mortgage. The “40-year mortgage” does not denote a specific mortgage program — it is an add-on feature to several different types of non-QM loan programs. A 1099 loan, a bank statement loan, an asset utilization loan or a debt service coverage ratio (DSCR) loan may each be modified to fit into a 40-year loan term.
There are two main camps of homebuyers who may stand to benefit the most from extending the mortgage term to 40 years. The first, as mentioned above, are self-employed workers or contract workers whose income is irregularly scheduled. They may fit best into a 1099 home loan or a bank statement loan, depending on their situation, and if their preference is for lower payments to account for the irregularity of their income schedule, the 40-year term add-on feature may work well for them.
The second group is real estate investors. Many real estate investors use DSCR loans for additional properties they wish to add to their portfolio because these mortgage programs primarily look at the potential cashflow from the investment property itself (rather than the borrower’s individual financial qualifications) to determine eligibility.
The primary benefit of the 40-year loan term is fairly obvious. The monthly mortgage payment usually goes down when compared with a more typical 30-year home loan. We will illustrate these monthly savings in the table below.*
A secondary benefit comes from the additional features that individual borrowers may be able to pair with their 40-year mortgage, since these loans happen in the non-QM space. A non-QM lender has more freedom in this space to decide who is eligible for these loans and in the features attached to the loans. A 40-year loan term may be paired with an interest-only period for a set number of years at the beginning of the term, which may be particularly beneficial for real estate investors who are actively building their business portfolio.
Remember, just because the home loan gives the borrower 40years to pay doesn’t mean the borrower has to take the full 40 years to repay the loan in full. Putting extra money toward each payment enables non-QM borrowers to save on interest over the life of the loan and pay it off faster.
In the following example scenario, with all other factors being equal, a 40-year bank statement loan saved the hypothetical homebuyer just shy of $150 per month in monthly principal and interest. It should be noted that not all bank statement loan programs Fairway has access to will have the same mortgage rate for 30-year and 40-year products. Rates, which are displayed here for educational purposes only, are subject to change at any time, and all loans are subject to credit and property approvals, according to each individual loan program.
In some cases, instead of saving on monthly principal and interest payments, the roughly $150 per month in the example above can be converted into additional buying power. In other words, these buyers may be able to afford a little more home using the 40-year option than they would be able to afford in a more typical 30-year mortgage.
“What you’re looking at is extending the buying power from maybe $500,000 to $550,000 purchase price,” Smith said. “That’s a different neighborhood. Maybe a different school district. It could be a big impact for somebody, and it’s the kind of thing that can be a conversation starter with certain buyers. Over 40 years, what’s $150 per month into a growth fund? These are things that get people’s attention.”
Or, in other cases, the 40-year mortgage term may be the difference in qualifying for a non-QM loan and not qualifying. These cases, though perhaps few in number, can be extremely impactful to the borrower who has been turned down for a mortgage by multiple lenders, maybe even lenders who have one or two non-QM options in their portfolio.
One of the potential advantages of working with a Fairway mortgage advisor is that we have multiple investors on board who have multiple non-QM programs, many of which are fully delegated and handled in-house. With Fairway, unlike many other non-QM lenders, we are more often able to originate the loan in our name, underwrite the loan with our team of dedicated underwriters and close the loan in our name as well. Not only does Fairway have the additional latitude described above by even offering these products in the first place, but being delegated in these programs gives us another added layer of control over the entire loan process, which makes the process run more smoothly — comparable to the process of a more streamlined qualified, conforming loan.
“Fairway has undertaken this initiative where we’re not just saying ‘we want to get to yes,’” Smith said. “We’re actively onboarding more and more programs that will bring homeownership to a wider swath of families. It’s being done tactfully and respectfully, but it’s also a leading-edge thing. Not only do we have one or two of these loan products that we’ve seen successful use cases on — we’re aggressively expanding our offerings. And as we expand these offerings, we’re gathering more and more delegated vendors, which means our team is in control of the entire loan process. It’s not just some dart board that we’re throwing at, hoping to have success. We know we can have success and bring more homeowners into the fold with these because we’re doing it every day. It moves the needle from commoditization of a product to something truly life changing for homebuyers as well as for Fairway loan officers and the agents who work with us.”
Some of the downsides of having a 40-year mortgage term are the ones that come with all non-QM loans. First, the obvious. As mentioned above, though the monthly payments are lower, the 40-year mortgage comes with a higher mortgage rate attached, as do most non-QM loans. That means interest paid over the life of the loan can be significantly higher than with a more typical 30-year loan.
The other downside is earning equity at a slower rate as well as paying that monthly payment for an extra 10 years — that is, if you don’t sell the property and pay off the loan before then. If you are considering extending the mortgage term to 40 years on your next mortgage, it's important to discuss all the loan options that may be available to you with your mortgage advisor. Together you can weigh the benefits of the immediate monthly savings against the longer-term costs of the loan.
Before committing to a mortgage with a 40-year term, be sure you’re familiar with other options you may have.
· Mortgage points — If your primary goal is to have smaller monthly mortgage payments, prepaying interest by purchasing points up front could have the same effect.
· Adjustable-rate mortgages (ARMs) — Especially if you’re planning to sell the home before the initial fixed-rate period ends (which can be five, seven or 10 years depending on loan program), an ARM may help you achieve the same goals in a more cost-effective way.
“The reality is that this space, the non-QM space that allows for the 40-year term, is a risk-based space,” Smith said. “And the less risky you are, the more it makes sense. High-performing business owners, be they lawyers with their own practices or longtime owners of any other community staple business, don’t need to fit into this narrowly defined box that the home loan was envisioned for originally. We’re lending and underwriting these loans with more common sense infused into the situation — that’s how I look at it. Twelve months of self-employment and 10% down is going to be looked at with more scrutiny than five years of self-employment and 20% down. It’s common sense, and I’m proud to be a part of a company that is at the edge — not at the edge of lending to riskier and riskier clientele, but of lending with a little bit of humanity and common sense at the center of the equation.”
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*Hypothetical monthly mortgage payments reflect hypothetical principal & Interest amounts and do not include estimates for insurance, taxes, or other possible fees. These figures and rates are for educational purposes only and do not reflect an official mortgage loan offer. Copyright©2025 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations may apply. Fairway is not affiliated with any government agencies. Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org). Equal Housing Opportunity.
