A mortgage term is the number of years you will have to pay off the loan. It’s important to choose your term carefully since it will affect your monthly budget, as well as the overall cost of your home.
Pros and Cons of a Mortgage With a Longer Term
If you take out a loan with a longer term, you’ll have lower monthly payments. For example, a 30-year loan will cost you less per month than a mortgage with a 15-year term. If you’re relatively young, you might feel comfortable taking out a mortgage with a longer term since you’ll have time to pay it off before you retire.
Keeping your monthly payments down can give you the flexibility to pursue other goals, such as saving for retirement. You might also want to keep your mortgage payments relatively low if you have or plan to have kids.
Taking out a mortgage with a longer term will cost you more in interest. Paying off your principal over a greater number of years means you’ll pay interest over a longer period of time. In addition, loans with longer terms generally have higher interest rates.
Reasons to Consider a Loan With a Shorter Term
If you’re getting close to retirement and you want to have your house paid off before you stop working, you might be better off choosing a mortgage with a shorter term, such as 15 years. Making larger payments might be a challenge, but you’ll have lower monthly expenses when you’re retired and living on a fixed income.
Taking out a loan with a shorter term can save you thousands of dollars. You’ll pay off your principal faster and will be charged interest over a shorter period of time. A loan with a shorter term will also most likely have a lower interest rate.
Select a Loan Term That’s Right for You
Before you decide on a mortgage term, think about your current financial situation, your goals and your age. If you want to keep your monthly housing costs down so you can focus on other priorities and you have plenty of time until you reach retirement age, you might prefer a loan with a longer term. If you can afford to make higher monthly payments, or if you’re getting close to retirement age and you want to pay off the loan as quickly as possible, a mortgage with a shorter term might be a better choice.
You don’t necessarily have to choose a 15- or 30-year mortgage. Those are the most common loan terms, but some lenders also offer terms of 10, 20, 25, or 40 years. One of those options might work better for you. Shop around and get quotes from several lenders before you decide.
