Whenever I hear the word “mortgage,” my mind typically goes to the traditional 30-year home loan. It’s the most talked about for a reason. A 30-year fixed rate mortgage is the most popular mortgage term. In fact, according to the Mortgage Bankers Association, 71% of people applying for purchase mortgages in April 2016 went for 30-year fixed rate loans.
But 30 years isn’t the best mortgage term length for everyone.
If I were your lecturing parent I might remind you, “Just because all your friends are getting a 30-year loans doesn’t mean you should, too.” It’s still worth keeping in mind, though.
So how do you choose a mortgage term?
Lower Monthly Payment vs. Lower Total Amount Paid
A longer term loan means a lower monthly payment, but it also means more interest accrued over the life of the loan. For example, a 30-year mortgage of a house with a purchase price of $200,000 and an interest rate of 4% will have a monthly payment of $955 (taxes and insurance not included). A 15-year mortgage for the same amount with a 3% interest rate will have a monthly payment of $1,381. That’s a difference of $426 a month.
While $426 a month may seem like a big number (and it is), it doesn’t seem that big next to the total amount paid over the life of the loan. Using the same numbers as above, just for the purchase price, a 30-year loan will end up costing $343,739, and the 15-year loan will be $248,609 – a difference of $95,130.
It all depends on how much you can afford and whether you prioritize monthly cash flow over interest savings.
If you need the low payment that a 30-year mortgage offers, but the interest over the life of the loan makes you uneasy, you always have the option to pay extra toward your monthly mortgage payment. Paying just $100 extra per month will save you almost five years and nearly $27,000. Check out our amortization calculator to see how paying a little extra can save you big down the road.
It’s also important to keep in mind that just because you get a 30-year or 15-year mortgage doesn’t mean you have to stay in it: You always have the option to refinance.
Let’s say you bought a home three years ago and now decide to refinance to get a lower rate and payment but don’t want to reset your loan back to 30 years. A custom-term mortgage, or YOURgage, of 27 years would be for you.
A custom-term mortgage isn’t just for refinancing, though. If you have a specific monthly payment amount or term in mind, a YOURgage is the way to go. It allows you to customize payment terms based on your goals, anywhere from eight to 30 years.
For example, if you plan on retiring in 12 years and are trying to plan ahead for a reduced income, a 12-year YOURgage ensures you have your home paid off before retirement.
A 30-year fixed, a 15-year fixed and a YOURgage are only a few of the home loans we offer. Check out the full list of mortgage options.
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