When you are in the market for a mortgage, whether you want to refinance your current loan or are buying a home for the first time, one of things you’ll need to think about is the mortgage term. The most common mortgage terms are for 15 years or 30 years. You can also occasionally find a 10-year, 20-year or 25-year loan. In some cases, when it comes to the length of your home loan, less is more. While a 30-year mortgage means you have a lower monthly payment, shorter terms offer a number of benefits.
Less time to worry about the mortgage
One major benefit of choosing a shorter mortgage term is that you’ll spend less time paying back the loan. That can be a benefit whether you’re getting your first home or refinancing. You won’t have to worry about your financial situation in 30 years’ time, as the loan will have been paid off in 15 or 25 years.
Payments aren’t that much bigger in some cases
While there can be a major difference in terms of monthly payments for a 15-year and a 30-year loan, if you go for an option such as the Super Saver 25 mortgage, the difference in size of the monthly payment is minimal. For example, if you refinance from a 30-year loan to a 25-year loan, you might end up paying just about $150 more per month. Over the course of the year, however, that could work out to one extra monthly payment.
Better interest rates
A bigger draw of the shorter mortgage term is the typically lower interest rate. Additionally, if you are refinancing now, you are likely to get a better interest rate than you have on your current loan, as rates are still low compared to the norm.
Even if the interest rates are the same for a 25-year and a 30-year loan, you end up paying less interest over the long run, since you’re putting more towards the principal over the life of the loan. In some cases, shaving just five years off of the mortgage’s term can mean you save more than $40,000. The exact amount you save depends on the balance on the loan and the rate you get.
Choosing a term
The term you choose depends on your budget and how financially secure your future is. You might be able to pay the monthly amount on a 15-year loan now but feel hesitant to commit to that amount for many years. In that case, a 25-year term offers the best of both worlds. You can still make extra payments on the loan to shorten the term and the amount you pay, but you will not be locked into a very high payment each month.
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