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Your Mortgage: Do You Want a Long or Short-Term Relationship?

Short-term mortgage

Mortgage rates are one of the top considerations when shopping for home financing, but it’s possible to save money by choosing a 15-year loan over a 30-year loan. Wondering if a 15-year mortgage is right for you? It could help you save money with a lower interest rate and less interest paid over the loan term. But if you need a lower monthly payment, a 30-year may be the right choice.

Let’s take a look at some of the pros and cons of each type, and we’ll also talk to a few homeowners to see what they’re doing to get the best of both long- and short-term mortgage loans.

Long-term mortgages

Many people ask what the benefits and disadvantages of a long-term loan are. In general, you will pay a higher interest rate and more interest over the life of the loan with a longer loan term. But your monthly mortgage payment will be lower than that of a short-term loan.

Long-term mortgages
Benefits Disadvantages
Lower monthly payments. Monthly payments each month are lower than a short-term loan. Lower payments over a long period of time serve as a benefit for first-time homebuyers and seasoned homebuyers alike when creating a budget and keeping to family and personal goals. Higher interest rates. With a long-term mortgage, interest rates are higher. When signing up for a long-term mortgage, a borrower may find himself locked into an interest rate what is as much as a full percentage higher than a short-term mortgage.
Higher total cost. With a long-term loan, the amount of interest a borrower pays over the lifetime of the loan can at times be comparable to the original principal the long-term mortgage was taken out for.

Short-Term mortgages (10-, 15-year)

You may be wondering what some of the advantages and disadvantages of a shorter term (such as 15 years) loan are? In general, a shorter term loan will have a lower interest rate and a lower total interest cost, but a higher monthly payment than longer term loans.  

Short-term mortgages
Benefits Disadvantages
Lower interest rate. In general, the interest rate on short-term mortgages is lower than longer term loans. The shorter the loan, the lower the interest rate. Higher monthly payment. For the same reason you pay less interest over the life of the loan, you’ll have a higher monthly payment on short-term loans. This is the reason you’re able to pay it off sooner and save money. So you have to decide if this is a disadvantage you can live with for the benefits you receive.
Lower total interest cost. Because your short-term loan is paid off sooner, you’ll pay much less interest over the life of the loan.

Long-term vs. short-term pros and cons

Here’s a table outlining the differences between short-term and long-term mortgages.

Pros and Cons
Factors Short-term Long-term
Monthly Payment Con: Higher Pro: Lower
Interest Rate Pro: Typically lower Con: Typically higher
Total Cost Pro: Lower Con: Higher

Long-term vs. short-term monthly payment comparison

Let’s say you were looking to purchase a $200,000 house with 10% down. So you’d be financing $180,000. With a 15-year mortgage at 4.15%, your monthly payment would be $1,345, while a 30-year mortgage at 4.5% would be $912.

Do long-term loans have higher interest rates?

In general, the answer is yes. Long-term loans do have a higher interest rate. For example, at the time of this article, the interest rates were:

Loan Term Interest Rates
Loan Term Interest Rate*
30-year Fixed 4.56
15-year Fixed 4.06
5/1 ARM 3.80

*These are average rates in the U.S. as of June 5, 2018

Things to consider when deciding on a mortgage loan term

How to compare loan terms

Comparing loan terms isn’t always easy — sometimes it’s not an apples-to-apples comparison. That’s why we’ve created this loan comparison guide to help you. While you may consider different aspects of the loan, including the rates, points and fees for each loan, you may also want to consider intangible aspects, too, like your relationship with the lender and their level of communication.

Savings

You can save a lot of money by choosing a shorter term loan, both because of the lower interest rate you’ll receive, along with the amount of interest you pay over the life of the loan, which is smaller because the time is shorter. This may be one of the major reasons people choose short-term mortgages over long-term ones.

How long you plan to keep home

If you know you plan to live in your home a long time, there’s nothing wrong with going with a 30-year fixed rate mortgage. However, if you think you may only keep the home a short time, then you may want to consider your short-term options, such as a 15-year mortgage or a 5/1 ARM.  Not sure if an adjustable rate mortgage (ARM) is right for you? Read this article to learn more about ARM loans, how they work and who benefits the most from them.

Which mortgage term is right for you?

According to the National Association of REALTORS, “tenure in the home has maintained a peak of 10 years.” This means many people who are taking out 30-year loans on their homes are only staying in their homes for 10 years.  Of course, you’re probably wondering which mortgage term is right for you, and depending on your situation, it could be either a longer term loan or a shorter one. So let’s look at some different situations and see what works best for each.

First-time homebuyers

Many first-time homebuyers are interested in getting the lowest monthly mortgage payment they can get, and if that’s you, then going with a 30-year mortgage will be your best choice. If your situation is unique, you may rely upon the advice of your real estate professional and mortgage lender to help you choose the loan term that’s best for you.

Established homebuyers

If you’ve bought homes before, then you understand the many options available to you. If you don’t mind a higher monthly mortgage payment, you might consider a 15-year mortgage to save interest. However, if you want the flexibility of a lower monthly mortgage payment while saving interest, consider a 30-year mortgage and make additional payments toward the principal each month. Just watch out for prepayment penalties. Check with your lender or loan servicer to find out if they will penalize you for paying your loan off early.

Refinancers

If you’re refinancing a 30-year home loan, consider a 15-year loan term in order to save yourself some interest and pay off the loan sooner. This may make sense if you’ve been in the home already for 10 to 15 years and your mortgage balance is lower now. You may realistically be able to afford a 15-year term loan payment. Just don’t forget to factor in the costs of closing on your new loan, which can certainly eat away at your potential savings.

Retirees

If you’re nearing retirement and are concerned about living on a fixed income, a 15-year loan can help you pay off your mortgage sooner. And living without mortgage payments can improve your cash flow and help maintain your preretirement lifestyle.

Getting the best of both terms

Lucinda Azami, a homeowner in Tucson, Ariz., first shared her personal journey to homeownership in our article on small mortgages. Despite having a smaller mortgage, she chose to go with a 30-year term loan.

“One of the reasons why I’ve always chosen a 30-year mortgage over a 15-year mortgage is because it gives me flexibility,” she told LendingTree. “I can pay $200 extra a month to pay down my mortgage sooner. But if I’m unable to pay the extra amount because of unseen expenses, I can still just pay my mortgage.”

Just consider that the interest rate on Lucinda’s $65,000 home is 4.0% and she’s been paying her mortgage for 12 months out of the total of 360 months. She’s saving $25,223 in interest and will be able to pay off her home 15.5 years sooner than the original 30 years. So for just an extra $200 a month, she’s getting the advantages of a 15-year mortgage, but the flexibility of the lower monthly payment that comes from a 30-year mortgage.      

The bottom line

As with any major financial decision, it’s important to consider your home financing options and the potential benefits and drawbacks of each. Consulting a professional financial adviser, tax accountant or estate planner can help with determining your best options and priorities based on individual circumstances. Shop multiple home loans and refinance offers by requesting free quotes from LendingTree’s network of mortgage lenders. Once you’ve reviewed and compared mortgage quotes, contact mortgage lending officers to learn more about available home loan and refinance programs.

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