When you apply for a mortgage loan, one of the first questions your lender will ask is how long of a term you are interested in. The most popular term length chosen is 30 years, but there are also 15 and 20-year options. Some lenders offer other loan programs with different term lengths as well. When you are making your decision about which term length to apply for, there are a few points that you should consider.
The Mortgage Payment
As a rule of thumb, the longer your term length, the smaller your mortgage payment will be. This is because the principal repayment for the loan is extended over a longer period of time with a longer-term length. Most borrowers prefer a lower monthly payment, but if you can afford a higher payment, you may consider the other benefits associated with choosing a shorter term length.
The Interest Charges
The interest charges for a longer-term length can be considerably higher than with a shorter-term length, and this means that the shorter term length loans are more affordable over the life of the loan. It also means that equity will accrue more quickly in shorter-term loans. By using an online loan calculator with an amortization schedule, you can see how the interest charges accrue for shorter and longer-term lengths.
Your Future Plans
A final point to consider when trying to decide which term length to choose for your mortgage is your future plans. A shorter-term length may be ideal if you are nearing retirement and want to pay off your loan before you reach retirement age. It may also be preferred if you want to build up as much equity as possible before you sell the home in a few years. Longer-term loans are often the preferred option if you have a tight budget and want to have extra cash on hand for other things, such as to pay off credit cards or simply to have wiggle room in your budget.
Choosing a term length for your mortgage is not something to rush into, and it is something that you should spend time researching and reflecting on. By doing so, you can make a more informed decision about which mortgage to apply for.