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Which Mortgage Term will Work Best for You?


What is the best mortgage term for you? There are so many different options on the market that it can certainly be confusing for most home buyers, especially if you are a first time home buyer.

Mortgage term typically refers to the number of years that the loan will last. Understanding the effects of the term of your mortgage can help you to choose the mortgage term that is best for your situation today as well as for tomorrow.

At one time, the two traditional choices were 15 year and 30 year fixed mortgages. Today; however, you will see a variety of other mortgage terms, including 20, 25 and 35 years. There are even sometimes mortgage terms that are offered for 40 years.

One critical element regarding mortgage terms that must be understood is that the longer you finance the mortgage, the lower your monthly payments will be in most cases. With that said; however, it is also critical to understand that the longer you draw out the payments, the more money you will pay overall for the house. This is because you will be paying more money in interest.

Conversely, the shorter the mortgage term, the higher your monthly mortgage payments will be, but the less you will pay overall for the house over the life of the loan.

You must also take into consideration the fact that a longer term will also slow down the build-up of equity in the home. Likewise, a shorter mortgage term will allow you to build-up equity at a much faster rate.

So, how much of a difference can a mortgage term make? Let's take a look at some examples. Let's assume that you have received a 5% interest rate on a loan for 15 years for a $100,000 loan. With this type of mortgage, your monthly mortgage payment would be $791. When you pay off the mortgage at the end of 15 years, you will have paid over $42,000 in interest.

Now let's assume that you have the same loan, with the exception that it is a 30 year loan. Extending the mortgage by another 15 years will lower your monthly mortgage payment to $537, but over the life of the loan you will now be paying more than $93,000 in interest. That is more than double the amount of interest that you would be paying with the 15 year mortgage.

As you can see, doubling the length of the mortgage can make some significant differences in terms of the amount of money that you pay on a monthly basis for your mortgage loan, but also how much you will pay in total interest over the life of the loan.

When choosing a mortgage term, it is important to take into consideration what is most important for you and your current needs. For some people, it is more important to make sure that they get a monthly mortgage payment that they can afford. For other buyers; however, it can be more important to pay off the mortgage loan sooner and save the money in interest. If you can afford the mortgage payment on a shorter mortgage term, this will often be the most financially savvy choice to make.

You must also take into consideration how long you plan to hold the mortgage. If you think that you may refinance the mortgage or even sell the home within the next few years, then the benefits of saving money on interest associated with a shorter term may not be as important as obtaining a lower monthly payment with a longer term. On the other hand, if you think you are going to be in the home for the life of the loan, or at least for longer than five years, then it may be a better choice to go with a shorter mortgage term so that you can pay off the loan sooner and save money on interest, provided that you can afford the higher monthly mortgage payment.

Ultimately, deciding which mortgage term is the best option for you is really a matter of person preference and there is certainly no right or wrong answer. Make sure that you take all of the facts into consideration and make sure that you make a decision based on your personal needs and situation. This will help to ensure that you receive the best mortgage deal possible that will benefit you not only today but also in the future as well.


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