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The Long and Short of Choosing a Mortgage Term

June 16, 2014
From Loan Officer Joy James

From Loan Officer Joy James

For homebuyers, one of the biggest financial decisions is what type of mortgage to choose. Fixed rate or adjustable rate? 15-year term or 30-year term. What’s the best financial decision for most borrowers? The truth is, there isn’t one single answer.

The answer depends on a number of immediate factors as well as future goals. No single solution is best for everyone. Here are some things borrowers should weigh when making the decision.

1.     What kind of payment can you afford?

A shorter term, such as a 15-year mortgage can save a borrower a substantial amount in interest payments over the life of the loan, but it also comes with a much higher monthly payment. Borrowers need to be sure they can afford this larger payment not just today but into the future, too, where income can change and unplanned expenses can be a surprise.

2.     What other priorities should you be funding with your income?

Can you continue to save for retirement or fund your children’s college savings if you choose a shorter-term mortgage? That’s an important consideration because of the value of compounding interest. By investing even small amounts over a period of time, you can see your savings grow because the interest earned begins to earn interest too. But that takes time, and if your mortgage payment leaves you little to invest, you may miss out on this opportunity. On the flip side, if the house is paid off, borrowers no longer have a monthly mortgage payment, so that freed-up money is essentially income.  Borrowers should run the numbers to see which option works best for them.

3.     Is this a mathematical question or an emotional one?

For most people, the idea of paying off their house is a lifelong dream. Those that have done it talk about the security and the peace-of-mind that comes from having no debt. Others weigh what the money that would go to a larger mortgage payment could be doing instead to save for the future. For some, the emotional security of getting out of debt more quickly outweighs any mathematical analysis.


Did you know?

During 2013, adjustable rate mortgages (ARMs) comprised 1-in-10 new home-purchase loans, according to the Federal Housing Finance Agency. It’s expected that ARMs will rise to around 12% of the home-purchase market in 2014.



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