When it comes time for you to decide on how long you want your mortgage to last, you have several options to choose from, each with their own pros and cons. Since no two people or families are exactly alike, each homebuyer will have his or her own specific financial capabilities and goals.
To accommodate these differences, you can obtain different terms for your mortgage depending on how long you want to pay it back. With 30-, 20- and 15-year terms available, you can choose the option that best suits your short- and long-term financial priorities.
Let's take a look at what these different options mean for you:
While three decades might seem like a long time to pay off a mortgage, the 30-year term is actually standard for a majority of homebuyers. According to Freddie Mac, 2016 saw approximately 90 percent of homebuyers opt for the 30-year fixed-rate mortgage. Its popularity stems from the length of the mortgage, which allows for lower monthly payments for the homeowner.
"The 30-year note allows for lower monthly payments for the homeowner."
Having to make smaller monthly payments makes a lot of financial sense for new homeowners who might not have the ability to make larger payments. However, it should be noted that 30-year terms often come with a higher interest rate than shorter mortgages.
Keep in mind that you can still make additional payments on the loan principal, which shortens the term length. This can help you speed up the repayment process and save money on interest.
After the 30-year, a 15-year note is also fairly common mortgage term. While not nearly as popular as the former, Freddie Mac noted that about 6 percent of homebuyers decided to go this route.
Since you'll pay off this loan in half the time as the 30-year one, it means you'll end up with a larger payment each month. Although you'll have a higher payment, the shortened term reduces the amount of interest that accumulates on the loan.
This is a great option if you want to finish your mortgage quickly and save money since you won't have to pay as much interest.
However, if your financial situation drastically changes, it could make it difficult to make these higher payments, so be sure you have a strong sense of your ability to pay off this mortgage.
In addition to the 15- and the 30-year terms, you can also implement a 20-year mortgage. This option typically has a repayment and interest rate that falls in between the other two options.
Homebuyers who have just started a new family or are planning on doing so shortly, a 20-year option makes for a great choice as you will have paid it off by the time the kids are ready to go to college.
The bottom line
With any major life decision that carries a long-term financial impact, it's crucial that you evaluate the different mortgage options and decide which one most closely aligns with your current and future situation. Talk with your First Centennial Mortgage loan officer to find out which term option works best for you and your financial situation.