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May 4, 2012

Which Term Is Right For You?

by Editor

Before you set out to secure the lowest mortgage rate available, you’ll need to make an important decision concerning your payment term. Almost every new mortgage customer struggles when it comes to deciding their amortization schedule. While some customers prefer the lower monthly costs of a long-term mortgage, other’s want to pay off their loan as quickly as possible.

So, should you go for a short-term or long-term solution? Let’s look at your options.

Why Does My Term Matter?

Your mortgage term will have a huge effect on the amount of your weekly, biweekly or monthly mortgage payment as well as the amount of interest you pay over the lifetime of your mortgage. When selecting the term for your mortgage, it’s important to note that the longer your mortgage term is, the higher your mortgage interest rate will be.

For example, a 10 year mortgage for $200,000 is paid off in half the time of a 20 year mortgage for the same amount. This is accomplished through a higher mortgage payment. While this will put slightly more strain on your budget, it will also help you avoid thousands of dollars in interest payments.

The Short-term Argument

Obviously, there are many benefits to a short-term mortgage agreement. Many mortgage brokers stick to the┬átheory┬áthat it’s better to continually renew your mortgage for short terms in order to avoid reduce your interest charges. This philosophy holds true, provided mortgage rates stay reasonably low and your budget is capable of handling higher payments.

Short-term Problems

It’s no secret that mortgage rates are currently at near-historic lows. Many first time home buyers who can afford a home today would never have been able to handle the interest rates from less than a decade ago. And, while rates appear to be frozen for the time being, there’s a very good chance that interest rates will begin to rise next year, if not earlier.

Which leads us to the main problem with short-term mortgage agreements: rate instability. If mortgage rates increase dramatically over the next 12 months, will you be able to afford to keep your home? If your answer is “yes,” a short term mortgage could be a great option for you. If you feel even the smallest inkling of doubt, don’t risk it – go for a long-term agreement.

Making the Most of a Long-term Deal

What if you could take out a 30-year mortgage, but still manage to pay it off in 15 years and cut your interest payments? Current market conditions are making it easier for first time home buyers and property investors to make the most of their mortgage payments and build equity faster.

When shopping for a best rate mortgage, ask your broker about mortgage acceleration options. Just because you’ve amortized for 30 years, doesn’t mean you have to take the full period to pay off your property.

Let’s pretend you’ve secured financing for a 30 year period. If your budget permits, consider making higher monthly payments, or increasing the frequency of your payments in order to whittle of more of the mortgage principle. Crunch some numbers using an online mortgage calculator or ask your mortgage broker to provide you with some additional figures. If your budget permits, you could lock in payments that match a 15-year amortization schedule, which would effectively help you shave more money off your mortgage principle faster, effectively shortening your mortgage term and reducing the total amount of interest required over the lifetime of your mortgage.

The nice thing about locking in a long-term mortgage is knowing you’re covered – just in case something unexpected happens and you need to cut back your payments to the base requirement outlined in your mortgage agreement. When you’re tied to the higher payment requirements of a short-term agreement, you could find yourself struggling to get by.

Need help deciding what mortgage term is right for you? Then contact a professional mortgage broker today.

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