When it comes to choosing a mortgage, factors like the interest rate and down payment requirements often get the lion’s share of the attention. However, thoughtful borrowers also pay attention to the loan’s term. Savvy consumers consider things like the impact the term has on the loan’s cost when they’re comparing mortgage terms. Then, they weigh the pros and cons to decide which loan term is right for their needs. What do you need to know about mortgage terms?
Comparing Mortgage Terms
Before comparing mortgage terms, you need to know exactly what you’re looking at.
Basically, a term is a period of time. In this case, it is the period of time that the lender sets for the buyer to pay back the home loan. It’s basically the lifespan of the loan, so before the term ends, the mortgage should be either refinanced or paid off. Common mortgage terms are 10 years, 15 years, 30 years, and 40 years.
Time and Money
What impact does the loan term that you choose have on your mortgage? If you’ve ever heard the phrase “time is money,” then you can probably guess. The time that you choose affects both the long-term and short-term costs associated with your mortgage. As The Motley Fool explains, lenders tend to view loans with shorter terms as less risky. As a result, 10- and 15-year mortgages generally come with lower interest rates than mortgages with 30- or 40-year terms.
What does this mean for your bottom line? A lower interest rate means that you pay less for borrowing the money, which reduces the total cost of the loan. However, cramming all your payments into a shorter period of time typically results in a steep monthly payment. Alternately, spreading those payments out over a lengthier span of time means that your monthly mortgage payment will be more affordable, even if you have a slightly higher interest rate.
Things to Think About When Selecting a Loan Term
When choosing a loan term, the immediate concern is how much of a monthly payment you can afford comfortably. While a shorter term will allow you to build equity more quickly and own your house free and clear sooner, it will cost you more each month. It’s also vital to think about how long you will stay in your home and your future financial goals and needs. Should paying off your mortgage quickly be your top priority? Are there other investments that would better serve your financial goals? Where is the best place for your money?
When a Short Term Is a Smart Choice
Which is the best option: a long-term mortgage or a short-term mortgage? The answer depends on your personal priorities, financial situation, and future plans. According to Smart Asset, a short term is a smart choice in circumstances like the following:
- Your job is stable, so you don’t have to worry about being unable to make your mortgage payments.
- Living mortgage-free is a personal priority.
- You don’t plan to be in the house for long.
- You are nearing retirement and want to pay your house off before leaving the workforce.
- You are at the halfway point of an existing mortgage and want to refinance.
When a Long Term Is the Better Option
When it comes to home loans, the 30-year fixed-rate mortgage is the most common choice (source). Clearly, there are appealing advantages to signing up for a loan with a lengthy term. As Smart Asset notes, a long term can be the better option in the following situations:
- An affordable monthly mortgage payment is your top priority.
- Your job situation is fluid, so you prefer the security of owing a smaller payment.
- You want to free up money for investments, retirement, education, etc.
- You want to extend the time that you can deduct mortgage interest from your taxes.*
Prepaying: Another Possibility
What if you want both the lower total cost that comes with paying off a mortgage in a shorter term and the safety of a smaller monthly payment in case things go wrong? It’s possible. As Zillow reports, you can manage this by securing a long-term loan and then paying more than is required each month. Whether you add a little extra to each of your scheduled payments, choose a biweekly payment schedule, or simply commit to sending any bonuses or tax refunds to the mortgage company, you’ll be able to pay down the loan more quickly, but you’ll still have the comfort of knowing that you can fall back to only the required payment if disaster strikes or your priorities change.
Would you like help comparing mortgage terms, understanding the impact of interest rates, or exploring the loan options available to you? At PrimeLending of Springfield, Missouri, we work hard to make getting the loan you need simple. Our team of experienced loan officers would be happy to answer your questions, help you explore your options, and provide the accurate information that you need to make the best decision possible. With our expertise and commitment to clear and timely communication, we can guide you through the process from application to closing. To learn more, please call 417-616-0777 or contact us online.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.