With buying a home more relevant than ever in building a retirement plan, it’s largely a financial decision. And that decision is anchored on a myriad of things, including the mortgage term.
In any homebuying venture, it’s essential to find the right mortgage term for you. Why? Your interest rate and monthly payment depend on it. But, how do you get to choose the mortgage term that’s right for you?
What Is Mortgage Term?
It’s got to be among the frequently, if not often, asked questions about mortgages. Mortgage term is the duration or length of your mortgage.
You take out a loan to buy a home. And there’s a specific timeframe on when this obligation is to be repaid.
With any loan obligation, you’ll incur an interest rate and make monthly payments. The length of your mortgage term largely determines those two elements.
The type of your interest rate is also one variable you have to consider.
Is Your Mortgage Rate Fixed or Variable?
Mortgages can have fixed or adjustable interest rates. The fixed-rate mortgage has its rate locked throughout the mortgage term. This protects you from any unfavorable rate fluctuations in the future.
For as long as your property taxes and insurance premiums and other assessments remain the same, you’ll be making the same monthly payment on a fixed-rate mortgage.
Expect the rate on an adjustable-rate mortgage to change periodically. It has a lower starter rate that remains fixed for a number of years. Payments during this time are relatively lower.
Once this fixed-rate period is over, the rate changes once a year thereafter. The volatility in rates results in unpredictable payments, something you have to consider even despite the rate caps.
Mortgage Terms Between 15, 30, and 40
In the mortgage world, 30 years is the standard repayment term. But there are terms that are shorter (15) or longer than that (40).
Let’s examine how the rates and payments work under each of the 15-, 30-, and 40-year mortgages. This is under the assumption that the mortgage is a fixed-rate.
15-year rates are historically and generally lower than 30-year rates. This results in less interest costs over the life of the loan and a faster payoff, too.
But to achieve both outcomes, you have to make higher payments because of the expedited repayment schedule.
Mortgage world’s vanilla mortgage. The payment structure is easy to figure out and leads to lower monthly payments.
Their relatively higher rates and stretched-out payments lead to higher interest costs overall.
Imagine adding 10 more years into your standard 30-year and you’ll get the 40-year mortgage. It’s not that easy to find a 40-year mortgage but its monthly payments are lower than that of the 30-year.
However, 40-year mortgage rates are higher than 30-year mortgage rates leading to higher interest costs paid throughout the life of the loan.
Choosing the Right Term
You’ve been presented with the some of the most common options for a mortgage term. It’s time to look into which option fits your goals, that is:
(a) Affordable payments throughout the life of the loan, (b) Lower interest rate throughout the life of the loan, (c) Lower interest costs overall, or (d) Faster payoff.
There’s also your budget to consider. If the payments are too hefty as in the case of the 15-year, you might be better off with the 30-year or 40-year for that matter. But consider the attendant costs of getting longer-term loans.
Your chosen mortgage term should also align with the years you plan to stay in the home.
There’s no wrong or right answer. What you can further do is consult with a lender to explore other factors that can lead you to an informed decision.