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Mortgage Guide

How to get a home loan

How long does it take to pay off your home loan?


Yes, buying your first home is a big step. It’s only natural that you'll be making major decisions along the way. One of the most important choices: How long will you pay off your home loan

There are 2 general loan terms you can choose from: Short term or long term. Both options have their advantages and disadvantages: 

 

Short term

Long term

Monthly payments

Higher monthly payment

Lower monthly payment

Interest rate

Higher interest rate

Lower interest rate

Overall interest payment

Lower interest payment

Higher interest payment

Total cost

Higher total cost

Lower total cost

Equity

Builds equity faster

Builds equity slower

Now, let’s discuss these elements one by one to appreciate how they affect your mortgage.

Monthly payments

Most borrowers choose short term mortgage to pay off the balance as quickly as possible. They trade off higher monthly payment so they can get rid of their loan burden immediately. On the other hand, those who choose long term mortgage opt to have a more affordable monthly payment, but over a longer period of time.

Interest rate

Lenders determine interest rates based on risk calculations. Short term mortgage usually gets lower interest rate because there is also a lower risk that the loan will be forfeited. Conversely, long term mortgage gets higher interest rate because there is a higher risk of default. The longer the term, the higher the interest rate.

Pro tip: To secure yourself from fluctuating rates, lock in your preferred rates.

Overall interest payment

When you pay your mortgage over a longer term, it also follows that you pay higher interest cost over the loan duration. For example, you pay an interest payment of $10 a month over 30 years. By the end of your loan term, you would have paid $3,600 in interest.

When you have a shorter term mortgage, you pay less interest cost overall. For example, you pay an interest payment of $10 a month, but over 15 years. After you paid your entire loan, your total interest payment is $1,800.

Considering your monthly and interest payment, a long-term loan is more expensive than a short-term loan.

Home Equity

Your home equity refers to your home ownership. You may have bought the house, but you don’t own all of it just yet. Your lender, who paid the property on your behalf, has a stake in it too. As your loan balance decreases, your home equity increases. When you choose a short term mortgage, you build equity faster because you pay off your loan equally fast. When you decide to go with a long term payment, it takes more time for you to build your home equity.

At this point, we are talking about general principles. At the end of the day, it all boils down to specifics: The number of years you actually have to pay and the interest rate you will be getting.

So just how much of a difference would it be if you choose a 15-year term versuse decide on a 30-year term? Find out using our monthly payment calculator.

Now, that you know the different benefits and consequences of short-term and long-term payments, how do decide which is better?

There is no fast-and-hard rule on which payment term is “better”. It really depends on your financial circumstances, goals, and needs. To help you figure out which option works for you, think about the following:

Age

If you are in your 20s or 30s and have a stable job, you can pay a mortgage over 25-30 years. But as you grow older, you may want to consider choosing a shorter term to ensure you have the financial capabilities to pay off your loan.

Income

Your monthly mortgage payment will eat a chunk of your income for a couple of years. Before you decide which loan term to go with, consider your monthly budget. After paying for mortgage, will you still have enough for bills, credit card payment, groceries, and other expenses? You should also check if you have enough savings in case of emergencies.

Purpose for buying the house

Did you buy the house for residential or investment purposes? Your reason for buying the property will factor in choosing between a short term and long term form of payment. If you plan to resell the house, a short payment term may be the better option so you can have a better ROI since the interest rate and total interest cost are lower.

Your loan term affects your monthly payment, your interest payment, and your home equity. Before you accept an offer, study each option carefully and compare loan estimates, item by item.

If you want to know more about the different loan term options, feel free to call (855) 610-1112 or email us and we will be glad to help!

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