One of the most important aspects to consider is the term of your loan when it comes to getting a mortgage. Nearly 90% of home buyers opt for a 30-year fixed mortgage but is it right for your situation?
The term of the loan plays a key role in the interest rate you receive and how much interest you pay during your home loan term. Longer loan terms are typically associated with lower payments, and shorter loan periods cost much less interest. But even with lower interest rates, the longer term may not be right for you.
How does your loan term affect how much you’ll pay for a mortgage?
A homeowner with a 30-year mortgage will pay a higher rate than a homeowner on a 15-year mortgage. In your repayment, a larger portion of the monthly mortgage payment goes to interest first. Some of your mortgage payments will go into capital and interest, and your repayment plan will indicate how much of each portion goes into which part.
Suppose you take out a 30-year mortgage with an interest rate of 3% and a monthly payment of $975. If you follow your repayment plan closely, you will pay $82,970 in interest over the life of the loan. Take out a 15-year loan and your monthly payments increase to $1,405, earning a total of $38,931 in interest on the loan.
A 15-year mortgage is much cheaper because it has a shorter term and limits your other options. A shorter-term loan usually comes with a lower interest rate because lenders are less exposed to risk. This means you can get a low mortgage rate with a short-term loan, even if you have to pay more interest over the term.
15-year mortgage pros and cons
● The equity will build up faster, and you can pay off the balance more quickly, which helps you take out a home loan or credit line at some point.
● Because interest rates are generally lower, you can spend less on interest costs to quickly pay off your debt.
● The shorter the term of the loan, the less you will have to spend on interest and the more you have to pay down debt.
● The shorter the term of your loan, the higher your monthly payments will be. Meaning your payments will be pushed into shorter repayment plans, so they will rise accordingly.
● A large part of your budget goes on housing, and that means less money being spent on things like holidays.
● If your 15-year mortgage comes with a higher monthly rate, you may not be eligible for a cheaper loan. This could mean buying a smaller house than you originally planned and you will be limited to the house’s purchase price.
30-year mortgage pros and cons
● A 30-year mortgage costs more in interest, but your monthly payments are lower and therefore more affordable. The loan will run for an extended period so the monthly rate will be lower. A 30-year mortgage means your payments are low and therefore more affordable as your loan lasts longer.
● Less of your monthly budget goes into housing costs, which means you can put more money into investment savings and other financial goals. You can buy a more expensive home, but you have more flexibility in emergencies and can go after investments, savings or other financial goals with less debt.
● The lower rate on a 30-year mortgage means you have a better chance of qualifying for a larger mortgage.
● You will spend more during the life of your loan. Interest increases depending on your loan term.
● Interest rates are higher because the lender’s risk is spread over several years.
● The longer it takes to build up equity, the more you will have to spend on the loan in total, and the longer it takes to build up equity.
Which loan is right for me?
If you are looking for a 15 or 30-year mortgage, you should carefully consider your monthly income and expenses. If you are looking for the best mortgage rate or looking to buy a larger property, the terms will affect both of these. A 15-year loan is best if you have a high income, few other debts, and a small home. On the other hand, a 30-year loan may be best, especially for those with higher incomes and less other debt, but also if they want a smaller home or buy more extensive properties.
When you are considering buying a home, it is crucial to find the best interest rates and credibility makes it easy. You can compare partner loans with one of our qualified loan officers right now, just fill out our zero obligation application here.