A Guide to Choosing a Mortgage Term
Homebuyers choose the number of years they’d like their mortgage to last. The 30-year fixed-rate mortgage is by far the most popular, followed by the 15-year fixed-rate mortgage, but terms of 10, 20, 25, and even 40 years are available.
The term that will work best for each borrower largely depends on the monthly mortgage payment they can handle and how long they plan to keep the property.
What Is a Mortgage Term?
The term is the number of years it will take to pay off a home loan if the minimum payment is made each month.
During the pandemic, homeowners have kept their homes for eight years on average, according to the 2021 National Association of Realtors® Profile of Home Buyers and Sellers. Knowing how long you plan to stay in your home can affect the type of home loan that fits your situation when you shop for a mortgage — short or long term, fixed or adjustable interest rate?
How Mortgage Terms Work
For fixed-rate home loans, payments consist of principal and interest, with a fixed interest rate for the life of the loan. With mortgage amortization, the amount going toward the principal starts out small and grows each month, while the amount going toward interest declines each month.
A shorter term generally translates to higher monthly payments but less total interest paid, and a longer term, vice versa. A shorter-term loan also will have a lower interest rate.
This mortgage calculator tool includes an amortization chart that shows how payments break down over a fixed-rate loan term. And total interest paid is predictable.
Most adjustable-rate mortgages (ARMs) also have a 30-year term. You can’t know in advance how much total interest you will pay because the interest rate changes.
How Long Can a Mortgage Term Be?
A few lenders out there offer 40-year mortgages. Qualifying is more difficult, and the rates are the highest among fixed-rate loans, while ARMs can be unpredictable.
The long term means a borrower will make the lowest possible monthly payments but pay more over the life of the loan than any other.
Fixed-Rate Mortgages vs Adjustable-Rate Mortgages
When you’re looking at different types of mortgages, start with one of the basics.
A fixed-rate mortgage is exactly what it sounds like. You lock in an interest rate for the entire term. If market rates rise, yours will not.
An adjustable-rate mortgage is much more complicated. An ARM usually will have a lower initial rate than a comparable fixed-rate mortgage, and a borrower may be able to save significant cash over the first years of the loan.
Recommended: Adjustable Rate Mortgage (ARM) vs. Fixed Rate Mortgage
But a rate adjustment can bring a spike in mortgage payments that could be hard or impossible to bear. With the most common variable-rate loan, the 5/1 ARM, the rate stays the same for the first five years, then changes once a year.
An interest-only ARM has an upside and downside. You’ll pay only the interest for a specified number of years, when payments will be small, but you will not be paying anything toward your mortgage loan balance.
An ARM may suit those who are confident that they can afford increases in monthly payments, even to the maximum amount, or those who plan to sell their home within a short period of time.
ARM seekers may want to apply for more than one loan and compare loan estimates. It’s a good idea to know the answers to these questions:
• How high can my payment go?
• How high can my interest rate go?
• How long are my initial payments guaranteed?
• How often do the rate and payment adjust?
• What index is used and where is it published?
• Will I be able to convert the ARM to a fixed-rate mortgage in the future, and are there any fees to do so?
• Can I afford the highest payment possible if I can’t sell the home, or refinance, before the increase?
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Comparing 15-Year and 30-Year Mortgages
Clearly, paying off a mortgage in 15 years rather than 30 sounds great. You’ll get a lower rate, pay much less total interest, and be done with house payments in half the time. The catch? Higher monthly payments.
Here’s an example of how a 30- and 15-year fixed-rate mortgage might shake out, not including property taxes and insurance and any HOA fees.
30-Year vs. 15-Year Fixed-Rate Mortgage
|Type||Loan Specs||Rate||Payments||Total Interest Paid|
|30-year||Appraised value: $375,000
Down payment: $75,000
Loan size: $300,000
|4%||Mortgage payment: $1,432||$215,607|
|15-year||Appraised value: $375,000
Down payment: $75,000
Loan size: $300,000
|3.2%||Mortgage payment: $2,101||$78,130|
There’s a reason that the 30-year fixed-rate mortgage reigns supreme: manageable payments that ideally leave enough money for emergencies and retirement savings. Borrowers making lower payments can always pay more toward the principal if they want to pay off the mortgage early.
Then again, borrowers with stable finances who can afford the higher payments of a 15-year home loan may find it quite appealing.
How to pick a mortgage term? Look at your budget, decide how long you plan to stay in the home, and weigh your priorities.
Speaking of terms, SoFi offers fixed-rate home loans with a variety of terms to fit your needs.
The SoFi home loan help center also covers mortgage refinancing, which may change an existing loan rate and term.
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