Is it Better to Get a 10, 15, 20 or 30-Year Mortgage?
There are so many options out there for homebuyers when it comes to a mortgage. Not only are there different options when it comes to the loan itself such as an FHA, USDA, conventional or VA, but the terms of the loan can vary greatly as well and you have to decide which makes the most sense for you, your household, and your finances.
It’s important to note that the shorter your mortgage term is the lower your interest rate will be. Similarly, the shorter your mortgage term, the less you’ll pay interest over time. The most common is a 30-year mortgage even though for a hot second there was a 40-year mortgage and in some odd cases that can still be arranged, but I strongly urged buyers against it. The most common is a 15 year or a 30 year but there are a 10-year and a 20-year mortgage and you have to decide which makes the most sense.
The most obvious reason to choose a 30-year mortgage is that allows you to buy more home and pay less per month than any other term. For instance, for $200,000 home you would pay about $956 per month on a 30-year mortgage. That same mortgage on a 15-year term would be about $1420. At the $500 difference but, you will be saving hundreds of thousands of dollars over the life of the loan by cutting your terms in half.
Choosing a 20 or 30-year mortgage means that you’ll also free up a lot of money during the month for necessary repairs, vacations, or pretty much anything else you want to spend your money on. Choosing a 30-year mortgage can help maximize your homebuying budget. Take a look at your monthly income and use about 28 to 30% of your gross or pre-tax monthly income on a mortgage payment. That means if you earn about $5000 per month you can afford about a $1400 mortgage payment including principal, taxes, any interest, and homeowners insurance, all of which can be built into the monthly mortgage payment.
A 15-year mortgage obviously means that you’ll pay off your home in half the time and you’ll build equity faster, be debt-free faster, and free up more money should you want to refinance or pull money out of your equity at a later time.
There are two major advantages to a 15-year mortgage versus a 30-year mortgage. A 15-year mortgage represents a lower risk to lenders so they tend to give you lower interest rates. If you have higher credit scores, lower term, you can qualify for an interest rate of at least 1% or more lower than a 30-year mortgage. That 1% could mean the difference of a $200 increase in your mortgage payment.
Ask yourself some questions to determine what is the best option for you:
Which makes more sense? You need the smallest monthly payment possible, you have some flexibility but don’t want to overextend your budget, or you’ll pay what you need to to get the home you want.
How is your budget look? Do you have enough to purchase what you want each month? Your budget is very tight? You wish you had more but can get by, or you have some flexibility?
There are other ways to determine the best loan for your finances. Other options include a 10-year mortgage or a 20-year mortgage. It’s okay to refinance just to go down in terms because you’ll be saving way more than the closing costs over the life of the loan. Often, people simply refinance to lower their terms rather than pull any money out.
There are a lot of different reasons to choose the loan term but asking some questions, going over your finances, and figuring out what works for you is what I love to do. Give me a call at any time and let’s help decide which mortgage term makes the most sense for you and the house you want to buy.