The Benefits and Drawbacks of Getting a Longer or Shorter Term on Your Mortgage
Are you currently in the process of purchasing a new house, and the many different mortgage term options have you feeling overwhelmed? Or maybe you’re thinking about refinancing your existing loan, and you’re trying to decide if a shorter or longer term will be better suited to your current and future financial needs. Before settling on a choice, it is critical to take into account both the positives and negatives of the situation. This article will discuss the pros and cons of opting for a longer or shorter mortgage term, giving you the information you need to make an educated decision that is in line with your long-term monetary objectives.
An Explanation of Some Common Mortgage Terms
When you’re in the market for a mortgage, the interest rate and the length of the loan are the two statistics that are most likely to come up in conversation. The length of time you have to repay your loan is referred to as your mortgage term, and it can have a significant influence on both the amount of interest you will pay each month as well as the overall amount of interest you will pay for the life of your loan.
The most typical periods for a mortgage are 15 years and 30 years, but you might also come across loans with durations of 10 years, 20 years, or some other length. So how do you go about selecting the appropriate term for the circumstance? Let’s take a look at some of the benefits and drawbacks associated with selecting a longer or shorter term for your mortgage.
One of the most significant advantages of opting for a mortgage with a term that is one or two years shorter than the average is that the overall amount of interest paid on the loan will be lower. This is due to the fact that the amount of time available to accumulate interest and fees is reduced when the loan term is shortened. Take, for instance, the case where you obtain a loan in the amount of $200,000 at an interest rate of 4% for a period of 20 years. You would wind up owing approximately $165,000 in interest after a period of 20 years. If, on the other hand, you took out that same loan but with a 10-year payback timeframe, your total interest charges would drop to just under $96,000 — that’s a savings of more than $69,000!
There is, of course, a cost associated with those reduced interest rates, and that cost is that your
The Benefits of Choosing a Longer Mortgage Term
One of the most important decisions you’ll have to make when it comes to getting a mortgage is how long you want the term to be for the loan. The “term” refers to the amount of time you have to pay off your mortgage until it is completely paid off. In most circumstances, it falls somewhere between five and twenty-five years, but in others, it can be as short as two years or as long as forty years. The length of the period can even go up to forty years.
The primary benefit of opting for a mortgage term that is longer than necessary is the reduction in the monthly payment amount. This is due to the fact that the cost of your loan will be stretched out over a longer period of time, which will result in each individual payment being reduced in size. If you are working with a limited financial budget and require some additional wiggle space in your monthly costs, this may be of assistance to you.
Choosing a longer term allows you additional time to add to the equity in your house, which is yet another advantage of selecting this option. The amount of the value of your property that you own completely is referred to as the equity, and it will grow as you pay down the balance remaining on your mortgage. If you need to sell your home or get a new mortgage in the future, having a larger amount of equity in it gives you more flexibility.
Choosing to extend the length of your mortgage term does come with a few potential drawbacks, though. The most obvious disadvantage is that it will eventually result in a greater financial burden for you in the form of increased interest payments throughout the duration of the loan. And because your debt will be paid off over a longer period of time, you may find that you are “house rich but cash poor” — that is, you have a lot of equity in your property but not a lot of marketable assets.
The Benefits of Having a Shorter Term on Your Mortgage
There are significant benefits that come along with having a shorter mortgage term, despite the fact that this will result in higher monthly payments. If you take out a loan with a shorter term, you will pay less interest over the course of the loan’s life, you will create equity in your house more quickly, and you will be debt-free sooner.
If you can afford the higher monthly payments of a 15-year mortgage, you will be rewarded with a reduced interest rate and will pay off your debt much sooner than if you take up a 30-year mortgage. This is because a 15-year mortgage has a shorter term than a 30-year mortgage. If you have a mortgage with a shorter term, you will accumulate equity in your house at a quicker rate. When you first start making payments on a 30-year mortgage, the majority of your money goes toward paying down the interest rather than the principal. When you have a mortgage with a term of 15 years, a greater portion of each payment goes toward the principal, allowing you to accumulate equity in the home more rapidly. Because the interest is compounded over a shorter period of time, you will have a lower overall interest payment throughout the course of the loan’s lifetime.
When Choosing the Length of Your Mortgage, What Factors Should You Consider?
In most cases, when it comes to mortgages, you have the option of selecting either a longer or shorter term for the loan. Both options come with their own set of advantages and disadvantages; the one that will work best for you is going to be determined by the specifics of your situation. When making your choice, you should take into account the following factors:
How much can you afford? If you extend the length of your mortgage, your monthly payments will be reduced; nevertheless, you will wind up paying more in interest throughout the life of the loan. If you are able to make the larger payments over a shorter period of time, a shorter term may be the better option for you.
Where do you want to get to financially? Do you plan to make an effort to pay off your mortgage as rapidly as you possibly can? Or are you more concerned with keeping track of the money you spend each month? Your response to this inquiry will play a role in assisting you in making a decision.
What is the state of the interest rate market at the moment? When deciding whether a longer or shorter term is appropriate for your financial situation, the interest rate plays a significant impact. When interest rates are low, it may be in your best interest to “lock in” that rate for the maximum amount of time possible. However, if rates are expected to continue climbing, selecting a shorter term could end up saving you money in the long run.
Examining the Benefits and Drawbacks of Mortgages with Varying Terms
When you are ready to purchase a home, the first thing you should do is select an appropriate mortgage. You’ll want to give careful consideration to a number of issues, including the advantages and disadvantages of different mortgage terms of varying durations.
Mortgages with terms that are shorter than those that are longer typically have lower interest rates.
Mortgages with shorter durations typically have higher monthly payments, but the total amount of interest paid is lower over the course of the loan.
When you take out a mortgage with longer terms, your monthly payments will be lower; nevertheless, the total amount of interest you will pay will be higher.
If you are able to do so, opting for a mortgage with a term that is shorter is normally the best decision. You will not only save money on interest, but also have your home paid off much sooner. If, on the other hand, a longer term is feasible for your financial situation, this could be an excellent strategy to keep your monthly payments at a manageable level.
Assuming that you are able to manage the larger monthly payment that comes with a loan with a shorter duration, the 15-year mortgage offers several significant benefits, including the following: In 15 years, you will have full ownership of your home. This increases the rate at which equity is built up, and if you ever must or want to refinance your mortgage, the price of doing so will be reduced because you will have less principle to pay off.
Because the loan term is shorter, interest will be accrued over a shorter period of time. Even with a little higher interest rate, this results in a savings of funds over the course of the investment. While the majority of payments on a 15-year mortgage go toward the principal balance, the monthly payments for a 30-year mortgage consist of approximately 60 percent interest during the initial phase of the loan.
However, there are a few negatives to consider: If you have other obligations or an unforeseen need comes up, having a shorter loan could mean that you have less cash flow each month, which could make things difficult for you. If you take out a loan for a longer period of time, you may have greater flexibility in the event that your life circumstances change in the future and you need to make adjustments to your budget.