Whether you are a buyer purchasing a new home (for you), or an existing homeowner, refinancing a mortgage (generally, to get a lower rate, better terms, etc), you will generally need to make a decision as to the length/ term of your mortgage. While there are many lengths, amongst the most popular are 15 years, 25 years, and 30 years. There is no rule – of – thumb, stating one length is better than enough, and it is often a personal decision, life circumstance, etc, which leads one to his decision. However, it is important to realize that each term – length, has some positives, as well as specific negatives.
1. 15 Years: Some lean towards this length, because they seek to pay off their mortgage sooner, and avoid the longer – term, continuous monthly burdens, of making that periodic installment payment. It generally carries the lowest interest rates, but one must also remember, mortgage interest is tax – deductible. While, in fact, the shorter the term, the lower the overall, total amount of payments, it also means higher monthly installments, which one must come up with. This offers many people far less flexibility. In addition, when the monthly payment is higher, it changes the formula, lenders use, to determine, how much one qualifies for.
2. 25 (or 20) Years: This is generally viewed as somewhat of a compromise length for one’s mortgage, longer than the shorter 15- year alternative, but shorter than a 30 – year one. The total charges are lower than a longer term, but higher than a shorter one. The interest rate paid is higher than a shorter term, but lower than a longer one.
3. 30 (or longer) Years: The 30 – year mortgage is the most popular one, because it is somewhat more affordable, on a monthly basis, usually permits someone to qualify for a larger size loan, etc. The drawbacks are the fears and trepidations, many have, about that long a commitment, as well as paying a slightly higher interest rate, and a larger total amount of payments, during its life. However, it offers flexibility, because it permits one to pay a smaller monthly amount, and therefore avoid the possible stresses on leaner months, while still offering the possibility of pre – payment, reducing the overall term. Pre – paying a mortgage is done, by paying an additional amount of principal to the regular mortgage payment, which will reduce the overall length of the loan.
Those contemplating a mortgage, should discuss their options thoroughly with both a real estate professional, as well as a mortgage professional. Evaluate and understand your options, consider the tax ramifications, and your personal circumstances, as well as your comfort zone!