What Length Mortgage is Right for You?

What length mortgage is right for you? It depends on a number of factors including your financial situation and the purpose for buying the property in question.

What Length Mortgage is Right for You?

If you want to buy a home, you are going to have to deal with mortgages. Many people focus on two factors when choosing a mortgage program. The first is the interest rate, to wit, how to get the lowest one possible to cut down on interest repayments. The second is the cost of the loan, to wit, how many points and other costs are built into a loan that otherwise looks good, but turns out to be a bad deal. Most people, however, completely fail to address the most important issue when choosing a mortgage - the length of the mortgage.

What length of mortgage is right for you? Well, it depends. In general, the shorter the mortgage, the better it is for you. Why? The primary reason is you will pay off the home loan much faster and save on interest payments. In turn, this will create more equity in your home that can act as a nest egg for those live events that require a little cash such as emergency medical bills, college tuition for kids and so on. If none of these life events occur, you can rest easy knowing you have a pile of wealth you are literally sleeping on!

So, how much money are we talking about here? For simple math, assume you borrow $100,000 at 8 percent interest. If you pay it off over 30 years, the monthly payment would be about $733. If you pay it off over 15 years, the payment goes up to roughly $955. By paying a couple hundred extra bucks a month, however, you come out big in the end. With the 30-year term length, you will pay upwards of $150,000 in interest on the loan. The 15-year term, however, results in total interest payments of around $90,000. In short, you save $60,000 by going with the shorter length. Since most mortgages are for much more money, the savings are actually much higher in real life.

Is a shorter length of mortgage always right for you? No. If you intend to live in the home for a relatively short time period, say two to five years, the total interest savings may not be significant enough to warrant paying a higher monthly payment. To make a determination for your situation, you need to analyze how much of a strain the higher monthly payments will put on your finances. It may be worth it, but then again it may not.

What length of mortgage is right for you? Shorter is generally better, but not always.