One of the key decisions you make when you select a mortgage is to the length of your loan. Length of your mortgage is also called your loan term. Lenders typically offer mortgages with 10, 15, 20, 25 and 30 terms, with the 30 year term being the most popular. What length mortgage you choose is an important decision because it impacts what size mortgage you can afford, your mortgage rate, monthly payment and total interest expense over the life of your loan.
For example, most people select a 30 year mortgage because it offers the lowest monthly payment which enables you to qualify for a higher loan amount. But the mortgage rate for a loan with a shorter term, such as a 15 year mortgage, is lower which enables you to save a significant amount of money over the life of your loan but your monthly payment is higher. So there are trade-offs between shorter and longer term mortgages that borrowers should consider when answering what length mortgage should I get?
The table below outlines some basic guidelines for mortgage length. To summarize the table, the longer the length of you mortgage, the higher your mortgage rate, the lower your monthly payment but the more interest expense you pay over the life of the loan. Additionally, the longer the term the larger the mortgage you can afford because the monthly payment is lower. The reason your total interest expense is higher with a longer mortgage is because you are borrowing the money for a longer period time which increases your interest cost.
The table also shows that the shorter your mortgage length, the lower your mortgage rate, the higher your monthly payment but the lower your total interest expense. The reason your monthly payment is higher with a shorter mortgage even though your mortgage rate is lower is because you are repaying the loan over a shorter length of time which results in an increased payment as compared to a mortgage with a longer length.
The example below shows what size mortgage you could afford with the same monthly payment for different lengths of mortgages. The example demonstrates how you can afford a larger loan amount with a longer mortgage. Note how the monthly mortgage payment does not change while the loan size increases significantly as the mortgage length increases. In this example you can afford a $610,000 loan with a 30 year mortgage as compared to a $427,000 loan with a 15 year mortgage -- a significant difference in loan amount. The example also illustrates how your mortgage rate increases as the length of your loan increases but your monthly payment stays the same.
The downside to a longer mortgage is that the borrower pays thousands of dollars more in total interest expense over the life of the loan. In the example below, we hold the mortgage size constant at $300,000 to demonstrate how the monthly payment decreases as the mortgage length increases but total interest expense increases significantly the longer the loan. This example illustrates how getting a mortgage with a shorter term can save you hundreds of thousands of dollars in interest expense over the course of your loan. In this case, the borrower saves $151,000 in total interest expense by selecting a 15 year term as opposed to a 30 year term -- for the same mortgage amount.
The table below shows mortgage rates and fees for leading lenders in your area. The table shows 30 year fixed rate mortgages, which means your interest rate is higher but your monthly loan payment is lower. We recommend that you contact multiple lenders to understand how your mortgage length impacts your loan terms. Shopping for your mortgage is the best way to find the loan that is right for you.
Now that you have an understanding of how mortgage length affects your mortgage rate, mortgage payment and total interest expense, we can return to the question of “What length mortgage should I get?” The answer to that depends on your financial goals. If you are seeking to maximize your mortgage amount and minimize your mortgage payment, then you should select a 30 year mortgage. If you can afford a higher monthly mortgage payment and want to save tens of thousands or even hundreds of thousands of dollars in interest expense over the life of your loan, then you should choose a shorter mortgage term, such as a 15 year loan. Although most people select a 30 year mortgage, consider choosing the shortest term that will also allow you to feel comfortable with your monthly mortgage payment.
Review our What Length Mortgage Should I Choose video to determine the loan term that is right for you.
One creative way to think about mortgage length is to get a 30 year mortgage but make the same monthly payment that you would with a 15 year loan, so a higher payment than what is required. That way you maintain the flexibility of having a lower required monthly payment that goes along with a longer mortgage (in case you cannot afford to make the higher payment), but you pay off your mortgage in approximately 15 years and save thousands of dollars in interest expense. Paying more than your required mortgage payment is called mortgage acceleration. We provide a comprehensive explanation of how mortgage acceleration works, including the potential benefits for borrowers.
We recommend that you pay off your mortgage as soon as possible so that you can start paying yourself instead of paying interest to the bank
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“Loan term.” CFPB. Consumer Financial Protection Bureau, 2017. Web.About the author