Factors to Consider Before Choosing a Mortgage Term

Like most grown-up choices, there’s not a one-size-fits-all template on financial decisions. The best option usually depends on your personal circumstances. Determining the length of your mortgage is one of those milestones.

 

Here are some simple factors to consider before you make a decision.

 

15-year vs. 30-year mortgage
Typically, financial institutions offer two options on a conventional mortgage loan: a 15-year or a 30-year mortgage.¹ The 30-year option is a favorite among homeowners because the monthly payment is lower due to the longer term.

 

Sounds good, right? Well, it depends. The major benefit of a 15-year mortgage is that it often offers a lower interest rate compared to a 30-year mortgage. This means you’ll pay less over the life of the loan because you won’t accrue interest as long.

 

Since the loan will be paid back in half the time, the monthly payment will be considerably higher—up to 50% higher. Since not everyone can afford that much of an increase, it’s important to take a long, hard look at your current income before you lock yourself into a high monthly payment.

 

What is your overall financial health?
Answer this question realistically. Do you have other debts such as high-interest credit card balances or an auto loan? Do you have sufficient savings stored for emergencies? Have you started a retirement savings account? Do you contribute the maximum amount allowed to your 401(k)?

 

Yes, your home is a huge purchase, and it can be a major part of a successful life. However, not all of your budget’s wiggle room should funnel into it. Other options for your extra cash? Direct it toward your 401(k) or repay high-interest loans.

 

If your financial health isn’t optimal, choose the smaller monthly payment with a 30-year mortgage or delay your home purchase for awhile to establish a strong financial picture.

 

Conversely, if these other considerations are all in good standing … congratulations! Your financial picture is healthy. You may be well-served to aggressively pay off your home with a 15-year term—which saves you money, too.

 

Income stability 
Your age and financial stability are huge factors that determine what mortgage length you should choose. Do you have a stable income? Proceed with caution if you aren’t fairly certain that your income will stay steady or increase in the future.

 

If retirement is on the horizon, consider how your monthly finances may differ with pensions, 401(k) withdrawals and Social Security checks. While your income will be more diversified, you won’t have the same tax deductions on your mortgage. The wisest decision may be to pay off your mortgage before you retire. Conversely, if you are a young, first-time buyer, you will have plenty of time to pay off a 30-year mortgage, making it the more straightforward financial choice.

 

Still need help deciding?
Evaluate what options are within reach with a 30-year mortgage loan calculator. Enter the loan amount and interest rate to see the impact of different mortgage terms on your budget.

 

If you can confidently afford more than the 30-year monthly payment but can’t quite swing the 15-year payment, opt for something in the middle. Take the longer mortgage length and regularly add extra money to your payment. This will shorten your mortgage length and result in less interest paid on the principal, without the commitment of a 15-year mortgage.

 

This is a good option, in particular, for young, first-time homebuyers. Keep in mind that your earning potential will likely increase as you build tenure and experience. This will help you gain more wiggle room in your budget. Use that to get ahead on your monthly mortgage payment.

 

Congratulations on your decision to own your own home. Whether your path to homeownership takes 30 years or 15 years—or somewhere in between—you’re on your way!

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¹Loans subject to credit approval. See current rates and terms. For a 30-year, $180,000 loan with a 4.5% interest rate, the fixed APR is 4.634%. The monthly payments would be as follows: 359 payments of $912.03 and 1 payment of $913.35. For a 15-year, $180,000 loan with a 4.0% interest rate, the fixed APR is 4.231%. The monthly payments would be as follows: 179 payments of $1,331.44 and 1 payment of $1,332.95.