How to Choose the Right Mortgage Term for Your Needs

Mortgage 101
Mortgage terms are important to understand when purchasing a home. It's important to know the potential monthly payments, how long your mortgage lasts and what interest rate you'll be paying.
Published on
August 21, 2023
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When you go to buy a house, one of the first things you'll need to do is choose a mortgage term. There are many factors that go into this decision, and it's important to know what they are so that you can make an informed choice. While there are several options out there, knowing what each one is like can help you decide which will work best for your situation.

A lot of people go with a 30-year or 15-year mortgage term, but are they right for everyone?

While it's true that 30-year and 15-year mortgages are the most common options because of their low interest rates, they're not always the best choice. The problem with these terms is that they typically end up costing more over the long term than other mortgage terms. If you have a good credit score and can get an interest rate below 4% (which would be considered excellent), then a 30-year or 15-year mortgage could save you money in the long run. But if your credit score is less than perfect, you may find yourself paying higher closing costs and rates for your loan. And even if your credit score is great and your interest rate is low enough to justify one of these longer terms, there are still other factors at play when it comes time to choose between them.

One important consideration: Monthly payments made when comparing different mortgages should take into account taxes and insurance (if applicable).

Your mortgage term will affect how you pay your loan back

Your mortgage term will affect how you pay your loan back, the interest rate you'll pay and the size of your monthly payments.

  • How much interest you pay: The longer the term, the more interest you'll pay over time. That's because there are fewer years in which to amortize a 30-year loan than there are in a 20-year loan (and fewer years left to earn compound interest).
  • How long it takes to pay off your loan: The shorter the term, the quicker you can get rid of it—but only if you have significant savings or income elsewhere that allows for extra cash on top of what's already going toward paying off your mortgage each month. If not, opting for a longer mortgage may make more sense so that money isn't being spent unnecessarily on shortening its duration but rather going into some other financial goal instead.
  • How much money is available each month: If one spouse makes significantly more than another spouse and there aren't any major expenses coming up soon (like saving for retirement), then he or she could consider taking out an extra large sum so as not to burden their partner with household debt; this would allow both spouses' incomes be put toward other goals like saving up for children's college education down the line rather than house payments right now.
How long you stay in your home has a big impact on the type of mortgage you should choose.

In general, the longer you plan to stay in your house, the more beneficial it is to choose a 15-year mortgage. This is because a shorter term means lower payments each month. The interest rate on a 15-year mortgage is higher than that of a 30-year loan, but this can be offset by the lower monthly payments.

If you're planning on moving within two years or less after buying your home and want to be able to refinance as soon as possible, then consider taking out a 30-year rather than 15-year loan. However, if you're going through some major life changes that might affect whether or not you'll stay put for long enough for those lower monthly payments to make sense, then consider taking out an adjustable rate 30 year fixed instead of locking yourself in at today's fixed rate forevermore with no way out until your line of credit expires in 25 years' time (if indeed such options are available).

A 15-year mortgage can get you out of debt faster, but it'll be more expensive every month.

If you're looking to pay off your house in a reasonable amount of time and don't see yourself staying in it for long, a 15-year mortgage might be the right choice for you. This type of loan will have higher monthly payments than its longer counterpart, but if that's what gets your future plans off the ground sooner (and saves some cash), then consider that worth the price tag.

If that's not an option for you, though—or if paying down debt isn't high on your list of priorities—a 30-year fixed rate is probably better suited to your needs. It'll cost less each month and allow flexibility as far as how long before (and after) retirement age makes sense to buy a new home or move somewhere new.

A 30-year mortgage isn't necessarily bad, as long as you can handle the monthly payments and know how to pay it off aggressively.

Even though a 30-year mortgage is a good choice for some people, it's not always the best option.

  • If you plan to stay in your home for a long time, the longer term might be better because it gives you more flexibility and lower rates over time. However, if you're likely to move within five years (or sooner), doing so would require paying hundreds of thousands of dollars in interest—not something most people can afford on their monthly income alone.
  • The interest rate is another factor that can affect whether or not this type of loan is right for you.
An adjustable rate mortgage can end up costing more over time than a fixed rate mortgage.

The initial interest rate is one of the biggest factors you need to consider when choosing a mortgage. The lower your monthly payments are, the better.

However, there's another factor that can make a big difference in your bottom line: how long the term of your loan lasts. If you have good credit and can afford it, it may be worth paying off your mortgage faster than usual by taking out a 30-year fixed-rate mortgage or even going for an interest-only option. However, if you're looking for something more flexible or want to keep some options open down the road (such as adding on a rental property), then an adjustable rate mortgage might be right up your alley!

Take time to think about your goals before you sign on the dotted line

Now that you've got a better understanding of your options and the pros and cons of each type, it's time to decide which mortgage term is right for you.

  • Before you sign on the dotted line with your lender, take some time to think about your long-term goals. Are you planning on owning this home for a few years or are you looking to settle down in one place? How much flexibility do you need from your monthly payments? How will changes in interest rates affect your budget going forward? These questions will help determine whether or not a 15-year mortgage is best suited for your needs.
  • If paying off debt over time makes more sense than making monthly payments, consider taking out a 30 year fixed rate loan instead. This option allows consumers access to lower interest rates while giving them more flexibility when it comes time to pay off their loan because they have more than 30 years until it becomes due (or “matures”).

As you can see, there are a lot of factors that go into choosing a mortgage term. If you want to get out of debt fast, then a 15-year mortgage might be right for you. But if you plan on staying in your home for years to come (and don't mind paying more each month), then maybe consider getting a 30-year loan instead. It all comes down to what works best for your lifestyle and financial goals.

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