When it comes to taking out a mortgage, there are so many unanswered questions. One of the biggest puzzles for most people is why they have the option to take out a mortgage for different lengths of time, known as terms – and ultimately, which term they should go for. Especially when US mortgage loan debt is only on the increase, it can be hard to decide which term to go for.
What’s the point of a mortgage term?
To understand the point of mortgage terms, you need to think back to the basics about what a mortgage actually is. Essentially, it’s a loan provided to you by a lender, which covers the cost of the property you’re buying and pretty much purchases the property for you. Then, you, as the buyer, will pay the lender off over a certain agreed-upon period of time.
The reason why different mortgage terms exist is that some people can’t afford to pay off their mortgage at the rate that others can. There are benefits to paying off your mortgage faster, of course, with earlier financial freedom being the main one. But agreeing to a shorter mortgage term means you’ll be paying off bigger amounts of what you owe on a month-by-month basis, which some people’s pay checks may not be able to cover.
What’s the right mortgage length for me?
If you’re trying to decide between a 10, 15, 20 or 30-year fixed-rate mortgage, you need to think about your own personal financial situation. Most people go for the 15 or 30-year mortgage, but it’s not uncommon for people to consider taking out a mortgage for even longer, with the 40-year term. Ultimately, a mortgage has to be affordable for you personally, and that varies depending on your own circumstances.
What to know about different mortgage terms
Generally, you can expect to see higher interest rates on the longer mortgage terms. This is to try and encourage you to pay off your mortgage faster – but as we’ve mentioned already, this isn’t always an option for everyone.
When you think about it, a shorter-term loan presents less risk to the lender, which is the reason why interest rates for 10-year mortgages are lower. A 40-year mortgage, on the other hand, carries a much higher risk. Over 40 years, there may be any number of reasons why you fail to pay off the mortgage in its entirety – including death. For that reason, interest rates are a lot higher for a longer-term mortgage according to letmebank.com.
If you’re weighing up your mortgage options, do the math and work out the total difference in cost between one term and another. Don’t go for a shorter term simply for the better interest rates, though. You need to be sure that you can afford to pay off a mortgage faster without it negatively impacting on your lifestyle.
Structure is key
When it comes to taking out a mortgage, you need to be sure that you’re doing it with a loan provider that’s clear on the different mortgage terms it provides, like Reali. Because Reali offers conforming loans, you’ll probably get better interest rates, too. You can read the review here for full insight on exactly how Reali works.
