One decision you will need to make when you select a home loan is how long the loan term will be. Should you go with a 30-year mortgage? A 15-year mortgage? Another loan term altogether?
This is one of the biggest decisions that you will make about your mortgage, and it is one which will affect you every day. Below are some considerations which may help you to think through the ramifications of going with a shorter or longer term for your home loan.
Benefits of a Longer Term
- When you pick a longer loan term like 30 years, your monthly payments will be lower than they would be if you went with a shorter term like 15 years. This can give you more room in your monthly budget, providing you with more time to pay off your loan.
- If you want to pay more on some months, you can.
- With more time to pay off your home loan, you may be able to purchase a more expensive and luxurious house than you could otherwise.
- Qualifying for a loan which has a longer term can be easier. Other aspects of the mortgage may be more competitive as well.
- With the money that you save each month with your smaller mortgage payments, you can invest or finance other purchases. You will also be keeping more of your budget liquid, which can be helpful in times of emergencies.
Drawbacks of a Longer Term
• The longer it takes you to pay off your loan, the more interest will stack up over time. This will add to the overall cost of purchasing a home.
• If you discover that you can pay your mortgage off early and your loan comes with a prepayment penalty, that could inconvenience you later down the line.
• It will take you a longer time to build up significant equity in your home.
• The interest rate for a mortgage with a long term may be higher than that for a mortgage with a short term.
Benefits of a Shorter Term
• If you believe that you can pay off your mortgage over a shorter loan term, it may be worth it. It can be a great feeling knowing that your home is all paid off, and choosing a shorter term when it is appropriate may reduce your chances of having to deal with prepayment penalties.
• Interest rates on loans with shorter terms can be lower. Not only that, but since you will be paying your loan off over shorter time period, the interest will add up to less over the mortgage’s lifetime.
• You can more rapidly accumulate equity in your home with a shorter loan term. You may be able to tap into this equity in the future when you need it.
Drawbacks of a Shorter Term
• You will have less of a buffer in your monthly budget and reduced liquidity in your finances overall when you’re making larger monthly payments on your mortgage.
• While you can always pay more than you owe on your mortgage for a certain month on a longer term loan, you cannot simply pay less on a given month on a shorter term loan without consequences. If you are strapped for cash on a particular month, you could fall behind more easily.
• Qualification requirements for a shorter loan term can be more intensive.
• You might need to purchase a more modest home and you would be able to afford with smaller monthly payments.
• You will have less money in your budget each month for investments or other purchases. This could reduce your progress toward achieving other goals you have set for your future, or remove them from reach.
Need Help Picking a Loan Term?
Even when you have thought through all the considerations above, it can still be difficult to figure out what loan term makes the most sense for your financial needs. The loan experts at Blue Square Mortgage would be happy to discuss your financial situation and goals with you so that you can make an informed decision. Please call (206) 352-6453 to schedule your consultation.