Date Posted: 1/9/2021 By: Bryan Dewberry
The Best Mortgage Term For You
Traditionally, borrowers can choose between 15- and 30-year mortgage loans. However, there are a variety of options that offer additional flexibility beyond the two timelines.
Shortening Your Loan Length
Borrowers are able to pay off their loans as quickly as they want as the majority of mortgage loans don’t come with any prepayment penalties these days. This means that if you have a 30-year loan, you’re able to turn that into a 10-, 15-, or 20-year loan by making larger or additional payments.
If you opted for a 30-year loan initially, your financial situation may have changed since then. If you’re seeing more disposable income within your budget, it may be time to consider making larger loan payments to save on some of your interest.
Comparing Monthly Payments
It’s best to consider your budget when deciding on a mortgage term. Here’s an example to help you weigh the overall costs:
In this example, if you’re looking to borrow $150,000 to purchase a home, you have two options:
- Choose a 15-year mortgage rate at 4.0%
- Choose a 30-year mortgage rate at 4.5%
If you opted for the 15-year mortgage, you’d be looking at the following:
- Monthly payments of approximately $1,100 (not including taxes and insurance)
- Close to $50,000 in interest over the life of the loan
If you opted for the 30-year loan, you’d be looking at the following:
- Monthly payments of approximately $760 (not including taxes and insurance)
- Close to $125,000 in interest over the life of the loan
It’s important to determine if saving on your monthly payments or saving on interest is more beneficial for you. While a 30-year loan gives you the opportunity to pay down debts and build an emergency savings fund, your home will come with a bigger price tag over time due to interest.
So What’s Right for You?
For many borrowers, a 30-year fixed rate loan is a great option. This loan offers manageable monthly payments, competitive rates, and flexibility to pay it down faster in the future. Current market conditions offer rates on longer loans that are closer to shorter loans as well, so there isn’t a huge advantage for one over the other.
However, if you’re serious about paying off your loan as soon as possible, it’s important to be honest with yourself. If you’re worried that you won’t have the discipline to put your disposable income towards paying extra on your mortgage, opting for a shorter loan length or refinancing may be the best move for you.
There is no one-size-fits-all in terms of mortgages. The best financial decisions always come with looking at your income, budget, and future goals in an honest and realistic light. Whether interest rates have dropped and you’re looking to refinance or you’re planning to pay off your mortgage with your retirement.