Getting a mortgage is a major commitment – you’re essentially promising to make monthly payments on your house for 15, 20 or 30 years. That timeline, also known as your loan term, is a huge consideration. Not only does it affect your long-term financial situation, but it also goes a long way toward establishing your monthly payment and the total amount of money you’ll end up spending on your house.
Learn the differences between common mortgage lengths and how each affects monthly payments, interest and long-term goals.
Key Takeaways:
- Your mortgage term is the number of years you have to pay off your home loan.
- A 30-year mortgage term is the most common choice due to its relatively lower monthly payments, but you’ll pay more in interest over the life of the loan. Shorter loan terms, including 20- and 15-year loans, have larger monthly payments but allow you to save more in interest over the course of loan repayment.
- Consider your financial priorities – such as building equity fast or securing a low monthly payment – before choosing a loan term.
What Is A Mortgage Term?
A mortgage loan term is the number of years you have to pay off your home loan. For example, you’ll pay off a 30-year mortgage in – you guessed it – 30 years, as long as you stick to the payment schedule.
Your loan term is important because it impacts your monthly mortgage payment, total home cost and other aspects of your finances. When you take out a mortgage, you repay the principal and interest with equal monthly payments spread over your loan term. The longer your mortgage term, the more time you have to pay off your loan, resulting in lower monthly payments. However, it also means more monthlypayments and a higher amount of interest paid.
On the other hand, shorter loan terms have higher monthly payments, but they can result in significant savings over the course of the loan. That’s because the quicker you pay off a loan, the less you spend on interest. Shorter loan terms also help you build equity faster, since you’re paying more of the loan’s principal each month.
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Mortgage Term Options
The mortgage term you choose can have a major impact on your finances. Here’s a breakdown of the three most common loan terms.
30-Year Mortgage
This is the most popular term length in the United States: Roughly 80%-90% of borrowers choose a 30-year term. However, many of these borrowers aren’t keeping their loans for this full duration, because the average homeowner stays in their home around 10–13 years.
With a 30-year term, your loan is broken into 360 monthly payments (30 years multiplied by 12 months). If you have a limited budget, this longer timeline can make it easier to afford a mortgage, as each monthly payment will be smaller. On the downside, you’ll pay more in interest over the life of your loan, and it will take longer to build equity.
Because 30-year mortgages are a longer commitment, they also tend to have higher interest rates. But due to the lower monthly payments, they can be easier to qualify for than shorter-term mortgages.
20-Year Mortgage
A 20-year mortgage offers a middle ground in both monthly payment and interest savings. With a 20-year mortgage, you’ll have 240 monthly payments. Each payment will be higher than that of a 30-year mortgage payment and lower than that of a 15-year mortgage payment on the same principal. Compared to a 30-year mortgage, you’ll also save considerably on overall interest paid.
15-Year Mortgage
A 15-year mortgage isn’t as popular as a 30-year mortgage – likely because you need to have a great deal of financial flexibility to afford the higher monthly payments. Spreading your mortgage over 15 years means making just 180 monthly payments. You’ll pay more each month, but you’ll build equity in your home much faster and save a significant amount of interest in the long run.
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Comparing Costs Of Different Mortgage Terms
Overall cost is one of the most important factors to consider when choosing a mortgage term.
Here’s a look at what you can expect to pay with a 30-year, 20-year and 15-year mortgage, assuming a $300,000 loan and a 7% interest rate across the board. (For simplicity’s sake, the following examples include only principal and interest.)
| Mortgage Term | Monthly Payment | Total Interest Paid | Lifetime Cost |
|---|---|---|---|
| 30-Year | $1,996 | $418,527 | $718,527 |
| 20-Year | $2,326 | $258,215 | $558,215 |
| 15-Year | $2,696 | $185,367 | $485,367 |
As the numbers show, the mortgage term you choose can have a massive impact on your finances, in terms of both your monthly payment and how much you’ll pay in interest over the course of your loan.
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How To Choose A Mortgage Term
Choosing a mortgage term is a major decision that has huge financial implications for years to come. Here are some factors to consider when making your decision:
- Your monthly budget: You need enough cash flow to cover your mortgage payment, so your monthly budget is key. Even if you’d like to avoid higher interest costs, if you can’t cover a 15-year loan’s monthly payment, that term won’t work for you.
- The home price: A shorter loan term may only be possible if you’re buying a home well under your means. If you’ve done some research and concluded you’ll need to pay a higher price to get what you need, a 30-year loan may be your only option.
- Your approach to debt: If being debt-free is important to you, you might prefer the idea of a 15-year mortgage term. With this option, you’d only carry the loan for 15 years, and you’d pay significantly less in interest over that time frame.
- Your desire for equity: You’ll build equity much faster with a 15-year loan compared to a 30-year loan, because you’re paying more toward the loan principal with each payment. If you’re eager to build equity, either because you plan to move or you want to leverage this asset, a shorter loan term might be a better fit.
- How much you value flexibility: Due to the lower monthly payments and longer timeline, longer loan terms offer more financial flexibility. This can be particularly beneficial if you’re uncertain about your income stability. Most conventional mortgages do not have prepayment penalties, allowing you to pay extra toward principal if you choose. If you need the extra cash in your monthly budget, you can revert to your standard payment.
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Bottom Line: Weigh Your Options When Choosing A Mortgage Term
Choosing a mortgage term affects more than just your monthly payments; it affects the interest rate you’ll qualify for, how quickly you’ll build equity and how much you’ll pay over the life of your loan.
For many, a 30-year mortgage is the only reasonable loan term for affording a house. However, if you’re purchasing a home well within your means and want to save significantly on interest, you might consider a shorter mortgage term.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
