One of the main factors that must be determined when getting a mortgage is how long the repayment period will be. But what's better, longer or shorter? As with any mortgage, there is no one size fit's all answer.
With that said, we can examine a few differences that will give you a better idea of which may be the better option for your mortgage needs!
Total Amount of Interest
With a 15-year fixed mortgage (one where the interest rate stays the same the entire term of the loan), there is a lot less risk for the lender to lend to you. This is because the shorter the term of the loan, the lower the chance that interest rates will fluctuate drastically.
That's a good thing for the lender, because if rates were to go up significantly at some point down the road, they would miss out on using the money they lent you to charge a higher interest rate then.
With this minimized risk, you get a lower interest rate when compared to a longer 30-year fixed mortgage! But let's say you had the same interest rate on a 15-year and a 30-year. Even in this scenario, you'd still pay far less interest on the 15-year. This is because by definition, you pay off your principal (the loan amount) twice as fast as you would for the 30-year mortgage, meaning less (and lower) interest payments!
This is where 30-year loans get their appeal. Let's say you want to borrow $400,000 for a home, and you have the option to pay it off in 30-years, or half the time, 15-years. For ease of understanding, let's say there's no interest. With the 30-year, you'd have to pay $1,111 per month to pay it off, but with a 15-year, you'd have to pay $2,222!
So this is where the main dilemma comes in for many people. Do I pay less money over time by having a shorter loan term, or do I allow myself to have more cash every month so I can live my life, and not be house broke? It takes a mortgage professional to help guide you through that answer.
Because your monthly payment is so much smaller with a 30-year fixed mortgage, it becomes far easier for potential borrowers to qualify for larger loan amounts. This means many borrowers lean towards getting longer term loans in order to qualify for as much money as is financially advisable.
It's almost always not a good idea to stretch yourself as far as your credit will allow, but many people want to know just how much home they afford in case there's something with a high price tag that they fall in love with while house searching.
What's Best for You?
As you can see, it's not easy to strike a balance between making a financially sound decision while simultaneously making emotional one. Yet this is just one of the many factors that go into determining your mortgage loan.
It's really important that you work with a mortgage broker that you trust, and knows how to break down the complicated mortgage process in a way that you can easily digest so you feel confident about your decisions. This is the broker Better Home Financial has been striving to be for the past 30 years!
We'd love the opportunity to service your loan, and help you make the biggest financial decision of your life. We'll show you how we provide our clients better rates, better service, and better solutions than anyone else out there!
If you want to get the process started, click here to start getting pre-approved online with us today.