Home loans come in many versions, with something to suit almost anyone. Fixed rate. Adjustable rate. Interest only. Conforming. Jumbo. First mortgage. Second mortgage. FHA. VA. Conventional. USDA. The good news is that you don’t have to navigate these choices alone. A First Choice Loan Services Inc. mortgage loan originator will be happy to guide you through the maze of acronyms and options to advise you when you are choosing the right loan term. However, it’s good to begin as an informed consumer with at least some knowledge of the loan process and loan possibilities. One decision that can have a major financial impact is the length of time you borrow money for your home, known as the loan term. First, let’s consider the most common loans.
It’s always 30, right? Not always, but almost. According to Freddie Mac, nearly 90 percent of borrowers choose a 30-year fixed-rate mortgage. That’s the gold standard in the US. A thirty-year fixed-rate loan offers stability and predictability. When you take out the loan, your monthly principal and interest payment will stay the same for 30 years. 30 years! What else is that stable? Certainly not rent. Note that I said principal and interest. Remember that the cost of homeownership will almost certainly increase over the years, and that includes 2 items that are usually escrowed and included as part of your monthly mortgage payment: property taxes and homeowners insurance. Over time, your monthly payment may increase, but the principal and interest component will stay the same.
Then there’s 15. The second most popular mortgage is the 15-year fixed-rate loan. It has the features of a 30-year fixed-rate loan, including stability and predictability, but you can own your home free and clear in half the time. 15-year loans are often the choice of people who are refinancing, particularly in a lower rate environment (like now). Depending on the current rate of your 30-year loan, you may be able to save by refinancing to 15-year loan. Why? Although your monthly payment will probably be higher, the interest rate will be lower and you’ll be paying for a shorter period. A loan checkup with your mortgage loan originator can tell you if a refinance is right for you.
Other loan terms. There are loan terms of 10, 20 and 40 years, but they are far less common than 30 and 15. Each one suits specific circumstances, but unless you fit that niche, it’s unlikely to be the best choice for you. If you are interested in a different loan term, explore your options with a First Choice mortgage loan originator.
Here’s the big deal. The major financial tradeoff between a longer and a shorter loan term is the monthly payment vs. the total cost of the loan. Loans with shorter terms generally have lower interest rates, but since you have less time to pay the loan, your monthly payment will be higher than a longer-term loan of the same amount. Where you save is on the interest paid over the life of the loan, and this can be huge. If you can afford the higher monthly payment, a shorter term could save you tens of thousands of dollars in interest over the life of your loan.
There’s more to choosing a home loan than deciding on the loan term, but it’s an important piece of the puzzle. For more information about homes loans, and help finding the right loan for you, contact a First Choice mortgage loan originator today.