When we talk about mortgages, we usually focus on interest rates alone. But there's something a lot more basic to consider first. How long is the best mortgage term: 30 years or 15 years?
30 Year Versus 15 Year Mortgages
There are two key issues when it comes to mortgages. One, how can you make yourself eligible for the biggest loan with the smallest payment? Two, how can you find the interest rate that is the lowest possible? Of course these are vital parts of a mortgage, there is another issue that some people overlook altogether and end up losing money.
A mortgage term is very important for a few reasons. For one, it specifies how long you are obligated to pay the lender. For another, it decides how much interest you'll be paying during the duration of the loan. In terms of equity building, these are really major concerns.
The longer you borrow money, the more interest you'll pay overall. Of course you will have smaller monthly payments if you can extend your mortgage over a long period of time, which is an advantage in some respects. When you're initially signing the mortgage it sounds great, but in the long term it can burn you.
Many homeowners single out the interest rate as a way to save on mortgage costs. This has its merits but it isn't nearly as effective as taking out a shorter loan. If you choose a mortgage with half the length, you'll be astounded at the savings on overall interest to the lender.
Choosing the term length of your mortgage loan is a choice that is up to you. Both have advantages and disadvantages, and your financial situation decides which is best for you. Shorter loans will have bigger monthly payments, so you need to figure out if you can afford them. Generally speaking, 15 year mortgages will have payments that are between 20% and 25% higher than 30 year mortgages. On the plus side though,you'll pay off the loan more rapidly and build equity in your home faster.
The mortgage market today carries products with various term lengths. The next time you're applying for a home loan, take a moment to compare the different terms and try to choose a loan that fits your circumstances.
by Adam Hefner
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