House Hacking: Purchasing With a 40-Year Mortgage

Before we dive into the 40 year mortgage - what differences are between a 30-year mortgage - and how it can affect your house hacks,

I'm going to give my 2 cents on the 40 year mortgage - and why it excites me when it comes to house hacking

To start off, as far as I know - the 40-year mortgage isn't available yet to homebuyers - purchasing as a primary residence. Which is a bummer.

I hope it becomes an option in the near future - because when it comes to house hacking - this will lower your monthly mortgage payment even further - 

than the monthly payment difference between investment financing - and the current 30 year fixed rate mortgage

So even though it's not here yet - here's the scoop on the differences between the 40 year and 30 year:

When you're looking at a 40 year - your monthly payment is going to be lower than a 30 year.

But, you will end up paying more interest - on that 40 year loan than the 30, of course - By a whole 10 years

So here's an example with 2 properties - one with the 30 year and one with the 40 year mortgage:

Assuming a loan amount of $200,000 = with a 6.5% interest rate - the interest payments for Property 1 (30-year mortgage) - would be a little over $231,000 - over the loan's term.

On the other hand, Property 2 (40-year mortgage) - would total a little over $297,000 in interest payments. 

Property 2, the 40 year mortgage - would cost you an additional $65,000 in interest - compared to Property 1.

But, with a longer loan term - the principal and interest are stretched over another 10 more years - resulting in lower monthly payments.

So with that - here is the difference in Monthly Payments:


For Property 1 (30-year mortgage) - in this example the monthly payment would be a little under $1,200 - (excluding property taxes, mortgage insurance -  and homeowners insurance - just the loan itself).

In contrast, Property 2 (40-year mortgage) - would have a lower monthly payment of around $1,050 - saving you around $150 per month.

So here are my thoughts on this:

Although you are going to pay more in interest on this 40 year loan - your monthly payment is going to be lower. This will result in higher cash flow. That gap difference between the monthly payment - on the 30 and 40 year - is going straight into your pocket.

Remember - your tenants are paying for the mortgage here - not you. So that $65,000 extra you'd pay in interest - in this example - you aren't paying for.

But, you are going to receive an extra $150ish per month in cash flow - just from the different loan type.


Now - if you're buying a 200k property here in this example - with a 40 year loan term - and a lower payment - this means each monthly payment will allocate less towards equity, rather than the 30 year

So if you are planning to refinance or sell this property in say, 10 years - your equity in the property with a 40 year loan - will be less than the 30.

So keep that in mind - but - there is a little hack to this

With the additional $150/mo in cash flow from the lower payment - you can take some or all of that - and start making extra payments each month towards the principal.

This will paydown your mortgage quicker - and give you maximum flexibility towards your goals with that property

Essentially, with extra payments - you reduce the loan balance - which will in turn payoff your mortgage faster - so you don't have to hold this property for 40 year until it's paid off

And of course - you can do this with a 30 year as well. 

It's important to note when refinancing - you can only refinance into a loan - with a shorter loan term

So you can refi from a 40 to a 30 year - or a 30 year to a 20 year - but you can't go backwards, turning a 20 into a 30 or a 30 into a 40.

This is what I mean with maximum flexibility - and why the longer loan term is a great option


To wrap this up here - who should use a 40 year loan?

As you can see, that extra 10 years - will cost you an additional $65,000 - and only reduce your monthly payment by about $150/mo

in my opinion - If you are not going to house hack your property - or rent it out at all  - you are better off with the 30 or 20 year loan - if you can afford it.

It doesn't really make sense to elongate your loan - unless you have no other choice.

The principal paydown is slower - you're paying more in interest - and it's much harder to refinance - or sell - in a shorter time frame.

But, if you're not house hacking - and it is the only option for you - and you REALLY want to buy a home - it is better than nothing.

This 40 year loan will benefit someone house hacking - not the buyer who is just using as a primary residence - with no intent to rent it out

So take these all into consideration - when you're deciding whether or not to buy a home - house hacking or not. 

Fingers crossed this becomes a thing in my lifetime!









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