How to Pick the Right Mortgage Length for You

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When shopping for a mortgage, one of the most important decisions youll have to make is the length of the repayment period. Most homebuyers choose 15- or 30-year mortgages, but some lenders offer additional options. The length of the term will have a major impact on your monthly payments and the amount of interest youll pay over the life of the loan. Before deciding on a mortgage term, think carefully about your current financial situation and goals.

How the Loan Term Can Affect Payments and Interest
A 15-year mortgage has significantly higher monthly payments than a 30-year loan because the principal needs to be paid off in half the time. Payments on a 15-year mortgage are not quite twice as much as payments for a 30-year loan because the interest rate on a shorter mortgage is lower. Paying off your mortgage in 15 years could allow you to save tens or even hundreds of thousands of dollars in interest, but you might be more strapped financially because of higher monthly payments.

Which Loan Term Is Right for You?
If youd like to save for retirement and/or your childrens college education, choosing a 30-year mortgage with lower monthly payments would leave you more room in your budget for those priorities. If youre relatively young and your savings were allowed to accumulate interest over a period of decades, they could outpace what youd pay in mortgage interest. Low loan payments could also allow you to pay off high-interest credit card debt and free up money for other priorities.

If you took out a 30-year mortgage, you might be able to pay it off sooner by making extra payments or by paying more than the required monthly amount. Some lenders charge prepayment penalties, so check with yours before you pay extra.

If you dont have much other debt and youre already saving for retirement and your childrens education, you might want to consider a 15-year mortgage. The payments would be much higher than they would with a longer loan, but youd pay less in interest. If you plan to retire relatively soon on a fixed income, it could make sense to pay off your mortgage quickly to avoid paying for housing after you stop working.

Before you choose a loan with a shorter term, think about your current income and whether you could afford high mortgage payments on top of everything else in your budget. Also think about how secure your and your spouses jobs are. Make sure you have a substantial emergency fund in case one of you lost your job or became unable to work for some reason.

Look at the Big Picture
Lenders offer mortgages with a variety of terms for homebuyers in various circumstances. Consider the amounts youd pay each month and over the life of the loan, and choose the term that would also allow you to achieve your other financial goals and live comfortably.

Published with permission from RISMedia.

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