Why I HATE 40-Year Mortgages

By Jay Voorhees

April 12, 2023 3 min read

There has been a lot of hubbub recently about FHA’s 40-year mortgages.

But – it is all for naught, as FHA is ONLY offering 40-year mortgages for loan modifications for borrowers who are having trouble making payments.

FHA IS NOT OFFERING 40-YEAR MORTGAGES FOR STANDARD PURCHASES AND REFI LOANS.

There are many lenders that do offer 40-year mortgages, including JVM Lending, but there are many reasons why I think they are a terrible idea.

40-year mortgages will increase affordability (a good thing) but that will simply push up prices (a bad thing) because buyers at the low end of the market will bid or buy up to their maximum affordability. In other words, like all affordability programs in the face of supply constraints, 40-year loans will push up prices and put us right back to where we are now with respect to supply and demand imbalances and affordability issues.
40-year mortgages address demand but NOT supply issues. This is largely a repeat of the above point, but I just want to drive home the point that we need to address housing supply issues (not demand issues) by making entry-level housing much cheaper, by offering tax incentives to builders, by lowering soft costs (permitting, etc.), by eliminating green mandates, and/or by loosening up zoning restrictions.
40-year mortgages come with higher rates. The 40-year mortgages that most lenders offer come with rates that are so much higher than 30-year mortgages, they are not worth it. This is both because 40-year mortgages are not as heavily traded as the standard 30-year mortgage (they are barely “traded” at all for that matter) and, as longer-term debt instruments, they are necessarily riskier so lenders will charge higher rates for that risk.
40-year mortgages don’t offer that much payment improvement in any case – even if the 40-year rates are not higher. Per this brief WPTV column, “Bankrate.com recently compared 30- and 40-year mortgages and found on a $312,000 loan at 6.85% interest, the monthly payments were $2,044 for 30 years and $1,904 for 40 years.” So, not a lot of savings.
40-year mortgages result in far more interest over the life of the loan. With the $312,000 loan I use in the above example, 40-year borrowers will end up paying $170,000 MORE in interest over the life of the loan.
Borrowers will often default anyway no matter how low their payment is … if they are upside down. This is a point Brian Stevens made in this short, recent and very good NREP Post about 40-year mortgages. It is a point I have been making for years too. After the 2008 meltdown, most borrowers didn’t walk away from their mortgages because their payments were too high; most walked because they had no equity and did not WANT to keep paying. The NREP hosts also discuss how Japan’s 100-year mortgages did little to help Japan’s housing market.