What Mortgage Term Length is Right for Me?
Published: 11/03/2012 by Kevin Mulligan
Decades ago you didn't have many options for mortgages lengths. Terms were usually 30 years or 15 years, and there were no exotic options. Your banker closely reviewed your finances, gave you the mortgage, and then stuck the paperwork in his desk drawer. That bank would then collect your payments for the next 30 years.
Things are quite a bit different now. Mortgages are rarely held by the financial institution that originates them. Exotic options have given more flexibility to borrowers, sometimes at their own detriment.
Navigating the mortgage waters can be confusing. Let's look at all of the various mortgage types you can now choose from when buying your home or getting a refinancing quote.
Various Mortgage Loan Options
Looking to apply for a mortgage loan? Before you sign papers on your home you need to understand what options you have with your mortgage. Choose carefully -- you'll be stuck with this loan for decades to come.
15 and 30 Year Fixed Rate
Thankfully you still have the traditional options of a 15 year fixed rate loan and a 30 year fixed rate loan. Mortgage rates for these loans are at historic lows and are likely to remain low for years to come.
Need more flexibility? Consider an adjustable-rate mortgage or ARM. ARMs are just what they sound like: mortgages with interest rates that fluctuate based on market conditions. Your ARM interest rate can change dramatically or not at all depending on the type of loan you have. It is key to know what rate your loan is tied to and what the caps on interest rate changes are for the loan.
For example, a 5/1 ARM is a mortgage with a fixed rate for 5 years. After that the rate can adjust up or down once per year. The adjustment would be determined by market conditions and the terms of your loan. This means you might get lucky – someone with a 5/1 ARM from 5 years ago inevitably paid a higher fixed rate of interest and with the historically low mortgage rates would likely enjoy a lower interest rate on their first adjustment.
Of course that also means that the rate can go up, too. With fixed interest rates being so low the likelihood of rates being higher in the future is more likely, so the ARM isn't as attractive of an option right now.
Want to take on an incredible amount of risk? Try an interest-only mortgage.
With this mortgage term you literally are paying only the interest on the loan. These loans were used during the housing boom to get unqualified buyers into homes they couldn't really afford. If you knock the principal portion of the loan out, you could drop over $200 off of the monthly payment of a $200,000 mortgage at the beginning of a 30 year term. This is to make the home seem more “affordable”. The only problem is it is like you are renting the home by never making principal payments.
Other Fixed Rate Terms
Some financial institutions offer different length mortgages of fixed length. The 40 year mortgage was popular in California for a time due to the high real estate costs there. (If you have to extend your payments for 10 years to afford a property... you can't afford the property.)
But not all differing mortgage lengths are bad. Credit unions often offer their members terms of 10 and 20 years in addition to the more traditional options of 15 and 30 year loans.
No matter which mortgage you go with, be sure to do research on the rates, how long you will agree to make payments, and negotiate the price of the home well. This is one of the few times you'll spend several hundred thousand dollars. Make sure you get it right.