Your home is likely one of the largest investments you’ll make in your lifetime. Because of this, you need to enter into your home loan carefully. You need to know all of the available terms and the options at your disposal. This way you can make the choice that makes the most sense for your situation.
The Longest Term for a Home Loan
It is possible to take out a 40-year term home loan. We don’t necessarily recommend it, but want you to know of its potential availability. This term is usually reserved for borrowers that need a rather low monthly payment in order to get qualified.
The problem with the 40-year term is two-fold:
- You’ll stretch the payments out over 40 years, making it very hard to build equity in the home
- You’ll pay an excessive amount of interest over the life of the loan
Chances are, though, even if you have a 40-year term, you won’t keep the loan that long. You’ll either sell the home before then or pay the loan off early. Even if you pay it off early, though, you’ll likely have a higher interest rate than you would have had if you took an average term loan. This means you’ll pay more interest to borrow the same amount of money just because you stretched out the term.
If you have a plan in place, though, and need the longer term just to get the lower payment, the option is there. Just make sure you follow through on your plan in order to minimize the amount of interest you pay.
The Average Term for a Home Loan
Typically, borrowers opt for one of two loan terms – 15 or 30-year terms.
The 30-year term is the most common. It offers a slightly lower payment than a 15-year term would offer, but again, has a slightly higher interest rate. It’s the most common term because many borrowers cannot afford the 15-year payment. This term requires you to pay your loan off in half of the time.
The benefits of the 30-year term include:
- Affordable payments without going overboard with a 40-year term
- The option to make additional payments (even equal to a 15-year term) if you can, building equity faster
- Freedom to invest any available money you have after paying your monthly bills
- The ability to refinance into a lower term if you need to down the road
The benefits of the 15-year term include:
- Pay the loan off in half of the time
- Secure a lower interest rate than the 30year term
- Pay much less interest over the life of the loan
Whether you should choose a 15 or 30-year term depends on your situation. We often recommend that borrowers that are unsure take the 30-year term. You can always make higher payments. You can even ask the lender (or use a mortgage calculator) what the 15-year payment would be on your loan and make that payment. The 30-year term doesn’t require you to make that payment, though. You can make the minimum 30-year payment and not damage your credit. Making the higher payments, though, help you pay the loan off faster.
The Other Loan Terms Available
Outside of the common 15 or 30-year term and the unique 40-year term, you may also find 10, 20, or 25-year terms available.
You’ll find these terms with different lenders. Not every lender offers anything but the 15 or 30-year term. The 10-year term is as unique as the 40-year term. Not many borrowers can afford to pay the mortgage off in just 10 years. The 20 and 25-year term give you slightly higher payments and slightly lower interest rates than a 30-year term. They are often good for the borrowers that are not quite ready for the 15-year term, but don’t want a 30-year term.
In the end, the term that works for your home loan depends on your financial situation. Don’t just look at what you can afford right now. Look at your future. What is your job like? Do you see yourself at the same job for many years to come? Do you see your income status changing? Will you go from a two-income family to a one-income family once you start a family?
These are all things you must consider before taking out a home loan. Make sure you ask your lender plenty of questions so that you have a full understanding of the term you take. You can always take a longer term and make extra payments. You can’t take a shorter term and make lower payments, though. So choose your mortgage wisely.Click to See the Latest Mortgage Rates»