Match your mortgage term to your financial goals.

When financing a home, one of the key decisions is choosing the length of your mortgage term. A 15-year mortgage typically means a higher monthly payment, but you’ll pay off your house sooner. A 30-year mortgage stretches payments over a longer period, generally resulting in lower monthly payments. However, these aren’t the only factors to consider. Let’s take a closer look.

How long are mortgages?

Most mortgages, including those offered by Consumers, have terms of 15 or 30 years. At other financial institutions there may be less common mortgages, such as those with terms as short as 10 years or as long as 40.

What are your plans and financial goals?

Choosing a mortgage term is a personal decision. While a 15-year home loan might be right for your friend, a 30-year loan might be best for you. Your mortgage term should align with your individual plans and financial goals.

A 15-year fixed-rate home loan may be a good option for homebuyers who want to build equity as quickly as possible and don’t mind higher monthly payment compared to a 30-year loan. A 15-year mortgage may also have a lower interest rate and typically results in less interest paid over the life of the loan.

Borrowers who plan to stay in their homes for the long term, or make them their forever homes, often choose a 30-year fixed rate loan. By spreading payments out over thirty years, these homebuyers have lower monthly payments, leaving more money available for other expenses or savings.  However, the longer term length typically means paying more interest over the life of the loan than with a 15-year loan.

Adjustable-rate mortgages (ARMs) may be a less expensive option for borrowers who don’t plan to stay in a home for very long. ARMs commonly have total loan terms of 15 or 30 years, with an initial fixed-rate period that lasts 5 or 7 years. After this initial period, the interest rate adjusts periodically based on market conditions and the loan’s terms. Rate caps limit how much the interest rate can change at each adjustment and over the life of the loan. If borrowers remain in the home after the initial fixed-rate period ends, they can keep the mortgage and make payments at the adjusted rate or refinance the loan.

ARMs come with an important caveat. “Don’t assume you’ll be able to sell your home or refinance your loan before the rate changes,” advises the Consumer Financial Protection Bureau. “The value of your property could decline, or your financial condition could change. If you can’t afford the higher payments on today’s income, you may want to consider another loan.”

The most common mortgage terms

A 30-year term is the most common choice, accounting for 73% of mortgages, while 13% have 15-year terms, according to the U.S. Federal Housing Finance Agency.

Fixed rate mortgages account for 92% of mortgages, while ARMs account for just 8%, reports the Federal Reserve Bank of St. Louis.

Additional factors to consider when choosing a mortgage term

While shorter mortgage terms generally come with lower interest rates, interest rates aren’t the only factor to consider when choosing a home loan term. Other considerations include:

• Are you comfortable with an adjustable rate, or is it more important to know that your monthly payment will remain steady with a fixed rate?
• How long until retirement? Do you want to pay off your mortgage before you retire?
• What is your debt-to-income ratio (DTI)? A longer loan term may lower your monthly debt obligations and help you qualify for a loan.

We’re here to help

Your mortgage term affects your finances in both the short and long term. Take your time when deciding which mortgage term is right for you. If you have questions, talk to one of our mortgage loan officers. They can help you explore home loan options that fit your needs and financial goals.

 

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications and collateral conditions.