When applying for mortgages, you have the opportunity to select from multiple mortgage terms. Some of the most common mortgage terms are the 15-year and 30-year loan. But other terms are offered, such as 10, 20, and 40-year mortgages. Take the following factors into account when deciding what term will work best for your financial needs:
The Amount of Cash You Have to Devote to Your Mortgage Payment
In general, the longer your mortgage term, the lower your mortgage payment. This is because spreading the balance of your home's purchase price out over a longer period results in lower payments.
However, do not make the mistake of assuming that a 15-year mortgage payment will be twice that of a 30-year mortgage payment. Not only do shorter mortgage terms usually have lower interest rates, but you also reduce your interest expenses by paying off the loan in a shorter period of time.
For example, compare the monthly payments of a $200,000 mortgage for a 15-year and 30-year mortgage. Assume that the 15-year mortgage has an interest rate of 4.5 percent, and the 30-year loan has an interest rate of 5 percent. The 15-year loan will have a monthly payment of $1,529.99, while the payment for the 30-year loan is $1,073.64.
Remember, unless your mortgage has a prepayment penalty, you can always make additional principal payments to pay the mortgage off ahead of schedule. You don't have to keep your 30-year mortgage the whole term; instead, make extra principal payments to pay it off in less time. This lets you enjoy the savings of a shorter mortgage term without permanently committing to the higher payment.
Some feel that their extra cash is better off in an investment account, where it may possibly earn a higher return. Others prefer the guaranteed return you get by paying the debt off early.
The Length of Time That You Plan to Stay in the Home
You should also use the length of time that you plan to stay in the home when deciding your preferred mortgage term. If you know that you will only live in the home for a few years, opting for a 30 or even 40-year mortgage may be a better decision.
Many homeowners do not like to tie their money up in homes that they do not plan on staying in. Even though a shorter mortgage term does increase your equity at a faster rate, you sacrifice your liquidity with a shorter mortgage term. The only way to get this cash back is by selling the home or taking out a home equity line of credit.
Contact a company like JRT Mortgage for more information and assistance.