Mortgage Terms: What is the Best Length?
Mortgage Term: When it comes to calculating the final costs, it's just as important as your interest rate; maybe even more. Before you take out a mortgage to purchase your home, it's a good idea to be familiar with the benefits and drawbacks of long and short mortgage terms and to have an understanding of which one would be best for you.
The mortgage term is simply how long it will take to pay off the mortgage.
As with any loan, the longer the term the smaller the monthly payments. However, the longer the term, the more time there will be for interest to accumulate on the balance owed. With the compounding of interest over the years, you should keep in mind that what starts out as a small monthly payment on a long-term mortgage, could result in monthly payments at the end that rival or match those you would have made on a short term loan. For those who can't afford large payments now, but will be able to in the future, that's okay.
So what length of term should you get on your mortgage?
It's okay to stretch out your mortgage term if you can't afford large monthly payments, but stretching it out more than 15 years will probably be more of a hindrance than a help, no matter how low your interest rates are. Keep in mind as well that a long mortgage term means it will take much longer to build equity in your home, and that a longer term loan will most likely have a higher interest rate, since the bank has more of a chance of you walking away before the loan is paid.
The simple answer is that you should make your mortgage term as short as possible. The larger the monthly payment you can afford, the shorter your term will be, and you'll receive better interest rates and equity in your home that much sooner. Also, with a short-term mortgage, the house will be yours to own that much quicker.
The important thing to remember, however, is not to overstretch yourself and sign up for a monthly payment you can't afford, that could result in falling behind and getting yourself into some hot water. Make a reasonable assumption of what you can pay based on your income and expenses. Try reducing a few other daily expenses, if possible, to increase your mortgage payment and thus shorten your loan term. In the long run, it will make a lot of difference.