Mortgages are incredibly complex with numerous variables to explore and consider, so making the best possible choice for your situation is not an easy task. One of the factors that you must weigh is the length of your mortgage, also known as the mortgage term. Undeniably important, your mortgage term has the potential to affect your financial stability for decades. If you’re wondering how to choose a mortgage term, we encourage you to explore the pros and cons of some popular mortgage terms. Ten, fifteen, or even thirty years down the road, you’ll be glad you took your time and carefully assessed your options.
How to Choose a Mortgage Term
What Is a Mortgage Term?
A mortgage term is the period of time that starts with the drawdown of funds from the lender and ends with the date when the home loan must be repaid in full (source). Put simply, the mortgage term is the duration or lifespan of the loan.
What Is the Best Mortgage Term?
The best mortgage term for you depends on your unique circumstances. Your age, your budget, your comfort with debt, your investing savvy, your financial goals, and your plans for how long you will stay in the home that you’re buying can all impact what mortgage term best suits your situation (source).
The Pros and Cons of Popular Mortgage Terms
Mortgage terms are generally measured in years, and the options available vary depending on your circumstances and the lender that you select. Some of the more popular choices include 10-year, 15-year, and 30-year loans. When The Motley Fool evaluated the pros and cons of these terms, it reported the following:
- A 10-year mortgage term typically comes with a noticeably lower interest rate, so it tends to offer the lowest total loan cost. However, it is generally only a possibility for homebuyers who have a substantial down payment, and it usually results in monthly mortgage payments that are on the high side.
- A 15-year mortgage term also tends to come with a significantly lower interest rate compared to loans of longer duration. As with a 10-year-loan, the trade-off here is that the monthly mortgage payments are likely to be higher than those for a loan with a longer lifespan.
- A 30-year mortgage term is the most popular loan option among Americans buying homes, and it is normally a good pick for people who plan to stay in the home that they are purchasing for a long time. While you will likely pay more in interest, this is offset by the convenience of stretching the repayment of the debt out over the longer time period.
How to Choose a Mortgage Term
Still wondering how to choose a mortgage term? While examining the pros and cons of popular terms is helpful, many prospective homebuyers find it easier to approach the decision by pinpointing the strategy that best suits their needs. MyMoneyBlog.com recommends that people searching for a mortgage choose a strategy and use that to help them pick their mortgage term. They recommend the following approaches:
- Opt for the shortest mortgage term that you can afford. With a shorter term, you will pay less interest and build equity faster. So if those factors are your top concerns, keeping the mortgage term as short as possible makes sense.
- Choose the longest mortgage term available to you. Mortgages are relatively cheap, long-term loans. If you’re confident that you can invest your money elsewhere and generate returns that are higher than the interest rate on your loan, then carrying a mortgage can give you the financial freedom to use your funds in other productive ways.
- Go with the mortgage term that gives you financial flexibility. Choosing a 30-year mortgage doesn’t mean that you have to take the full 30 years to pay off the loan. People often pay off home loans early. If you want to pay your mortgage off sooner rather than later, why opt for a longer term? It’s a matter of financial flexibility. Choosing a longer term results in a lower monthly payment. While you’ll have to pay that much or risk losing your house, you can always pay more than required. This can provide vital breathing room in the event of a financial setback while still allowing you to pay off the loan more quickly if you prefer. If this strategy appeals to you, be sure to select a loan that does not have a prepayment penalty.
As you’re working out how to choose a mortgage term that suits your needs, it can be helpful to play with the numbers. Check out our user-friendly calculator to see the effect various mortgage terms have on a loan.
And when you’re ready to get started, contact PrimeLending. Our team is committed to helping you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying your first home. When you’re ready to learn more, please give us a call at 844-701-5626.