For most homeowners taking out a home loan, the maximum mortgage term is a popular option. Because total home loan payments are spread over a longer period of time, the monthly payments will be smaller. And 30 years are at a fixed rate, so this seems like a good deal.
But is that really the case? While a 30-year or even 40-year home loan sounds attractive to most homebuyers, there are some questions to consider before getting a loan. I hope this post has helped home buyers.
Long-term vs Short-term
The longer the mortgage, the more interest you’ll actually have to pay. Even though the monthly payments on a 30-year home are lower, you’re actually paying more interest than someone with a 10-year home.
Take, for example, a 30-year home loan with a 5% interest rate for $100,000. By calculation, your monthly payment is about $537.00. The total amount of interest paid over 30 years is about $93,000. On a 15-year home loan with the same interest rate and loan amount, the monthly payment would be about $785.00. And the total interest would be about $42,000 over 15 years.
As a result, monthly payments for a 15-year period are about $338 higher than for a 30-year period. The total interest expense will be reduced by about $51000. The term of the loan is half as long, total interest payments have more than halved. And the monthly repayment has only increase less than a half.
But a lower monthly payment can help ease some financial problems when your financial situation is uncertain. For example, you need money when you have just lost your job or have a large medical bill to pay. A longer mortgage does give you more flexibility.
Is a mortgage plan long-term or short-term better?
If you have some financial knowledge and are in a stable financial position, taking out a 30-year loan and putting the money into other investments will be a good choice. The long-term return on your investment may equal or exceed the amount you spend to pay off your home loan.
But if you don’t have financial knowledge and a steady income, I would recommend taking out a shorter loan. While you pay more each month, you’ll pay less for your home loan plan overall. In addition, you may build up equity in your home more quickly, which will also improve your credit score or FICO.
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