When you seek mortgage approval, you need to make a number of choices, one of which is the terms of a mortgage. This establishes the length of time necessary to repay the mortgage. This will have a big effect on your amount paid each month, your rate of interest, and the interest to be paid over the course of a loan.
Selecting the proper term is important if you want to retain your financial freedom. This article will teach you about the factors to take into consideration when establishing an ideal term.
MORTGAGE TERMS: WHAT ARE THEY?
If you take out a mortgage with a 30-year term, then you’ll be repaying the mortgage over the following three decades. The sum of your loan is amortized during that time, which includes interest and principal. At the start of your term, you’ll be paying a lot of interest, but a lot less principal. When you approach the term’s end, you’ll end up paying more principal, as opposed to interest.
If a 15-year term is taken out, then the loan will need to be fully paid in half the amount of that time. The amount of interest will also be less since the money you’re borrowing is for a brief duration. For the most part, lenders issue reduced interest rates for terms like these since it’s less of a risk for them to have the money tied up for as long as 15 years, as opposed to 30.
ASSESSING THE DIFFERENCE
When you’re trying to choose between a 15-year term and a 30-year one, you’ll need to assess your budget. For example, if you are interested in purchasing a home that costs $200,000 and need a loan that has an interest rate of 4%, a 30-year term would warrant a $955 monthly payment, while a 15-year term would amount to $1479. The difference is substantial. You can easily conclude if payments that big are affordable for you. Remember – will have to factor in insurance and taxes into the payment as well.
Maybe the bigger difference lies in the amount of interest that you will be paying over the course of a loan. For a 30-year term, the amount of interest you pay in total will be $143,700. On the other hand, you will be paying $66,200 worth of interest for a 15-year term. Reducing the loan by half reduces the amount of interest you will pay.
A 15-year term isn’t beneficial for everyone. Let’s assess when a three-decade term would be ideal.
SELECTING A 30-YEAR TERM
At first glance, it seems that a 30-year term is more expensive. However, there are options at your disposal. Actually, you’ll have more stability and flexibility with a 30-year term. The minimum monthly payment required will be lower. As such, if money is tight for a month or two, you will only need to make a small 30-year repayment. Ideally, you will not be in such a financial strain and still be able to afford the payment.
Fortunately, you have the option to make a bigger monthly payment than the bare minimum required whenever you like. You have the option to pay an additional $50 or $100 (or even more) every month. If you are able to afford it, 15-year repayments can be made. If you go through periods where you lack repayment funds, simply pay the minimum 30-year amount required. Just one additional mortgage payment every year is all that is necessary to knock a number of years off of the principle of your loan.
SELECTING A 15-YEAR TERM
If you’re sure your job is secure, and you put away enough money to make your 15-year repayments higher, it may be worthwhile. A significant amount of money will be saved on interest. If your job stability isn’t secure, or you have a career where your revenue is inconsistent, longer-term options are the better way to go. 15-year terms are ideal for people who are sure the higher payments can be made on a regular basis.
WHAT PLANS DO YOU HAVE?
You also have to take your plans for the future into consideration. Are you considering relocation over the next decade? Think about taking a shorter-term loan for the sake of minimizing the amount of interest to pay. When the principal is knocked down, a greater ROI will follow whenever you decide to sell the place. Your mortgage balance will be a lot lower, and you’ll have more money in your bank account.
If you’re confident that you’ll be living in the property for the loan’s duration, you may be better suited for a 30-year loan. It will give you more flexibility in the event of an unexpected occurrence. There won’t be any risk of losing the home since you accepted high payments.
Mortgage term selection comes down to your preferences. Meticulously go through your budget, then determine what is practical for you at the moment. Don’t forget, the 30-year option provides you with other choices when they become more affordable to you. A 15-year term forces your payment amounts each month to be higher.