Your New Loan: Deciding on the Length of Your Mortgage

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With myriad different loan products available, you may have difficulty choosing the length (commonly known as “term”) of your new mortgage. To avoid getting bogged down with all of the different options, here are a few questions you should ask yourself:

How important is the interest rate to me? Generally, the shorter the term is, the lower the interest rate will be. The spread between interest rates can be quite dramatic, although some differences—such as between a 15-year fixed-rate and a 10-year fixed-rate—may be less. Your rate will also depend on your credit and the type of loan you get.

How fast do I want to build up home equity? With a mortgage that has a short term, you’ll be able to build up your equity faster than you would with a mortgage that has a longer term. For example, with a 10-year mortgage, you’ll build up your equity—by paying off the principal quicker—three times faster than you would with a 30-year mortgage.

How long will I have this loan? Although this may be difficult to predict, you’ll need to take this into consideration so that you can figure your break-even point. If you’re not going to be in your home for very long—say 5-10 years—getting a 30-year mortgage may not make sense since you may only be paying off interest rather than principal.

How much can I save in interest? A shorter-term mortgage will save you quite a bit in interest. As an example, you would pay roughly $49,000 in interest on a 15-year $200,000 mortgage at 3.0 percent. Conversely, you would pay approximately $131,000 in interest on a 30-year $200,000 mortgage at 3.7 percent (which, yes, would be at a higher rate).

How much can I afford in mortgage payments each month? If you get a mortgage with a short term, be prepared to have higher monthly payments than you would with a longer-term mortgage. You’ll save money in the long run, but make sure you can afford the higher payments.

How important is it for me to own my home outright? If you’re looking to pay off your mortgage before a big life event such as retirement or sending your kids to college, a shorter-term loan may make more sense. If it’s not important, other factors such as whether the loan is a fixed-rate or an ARM, mortgage insurance requirements, etc. may carry more weight.

One thing to keep in mind is that you may not be limited to loans with just the standard terms, such as 30 years or 15 years. Many lenders offer mortgages with non-standard terms, so make sure to talk to your mortgage professional about the different types of loans available.

For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988.

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