How to Choose the right Term for a Home Mortgage

Mortgages come in all shapes, sizes and colors. Mortgages can be bought and paid for in less than a decade or spread out over 30 years. Selecting the mortgage term that is a perfect fit for you is a mixture of down payment, personal affordability and long-term financial responsibility, and it all comes down to five major factors.

1. Amortize it
Before you fall in love with a house, use mortgage calculators to make a responsible choice. Don’t max out your loan approval until you know how much the loan will cost in interest over a period of 10, 15 or 30 years. Consider reducing the amount you are willing to pay in favor of a responsible, long-term investment decision. When you amortize 30-year mortgages, you usually wind up paying twice what the house is worth. Is that worth it to you?

2. Calculate your affordability
If this is your first home, consider how your monthly payment compares to your rent payment. If this isn’t your first home, try to get a monthly mortgage payment as close to your current mortgage payment as possible. This number changes based on the term you select. Your goal is to get the shortest possible with the most affordable payment.

3. Look at the “hidden” costs
Do not forget that mortgages come with some hidden monthly costs. Things like property taxes and homeowner insurance premiums increase your monthly payment in escrow, usually changing the monthly affordability factor by a few hundred dollars. Do not just select a term with a comfortable principal and interest payment estimate when making a decision about your loan term.

4. Evaluate investment potential
The less money you owe on your home when you sell it means the more you net in profit. Since paying mortgage interest is akin to throwing money away in the trash and since lower payments affect your bottom line, choose the loan with the lowest interest rate and the shortest term.

5. Think ahead
If this is your first home purchase, it is unlikely to be your last. Think ahead and put yourself in a better position to buy your next home in 7 to 10 years from now. For example, if you financed a home for 15 years that you could feasibly pay off in seven years, you stand to profit more and walk away with a higher down payment for your next, nicer home.

Shopping for the right mortgage term should include making financially sound decisions for the future. Evaluate your affordability now and over the next 10 years, account for hidden costs and look at the bigger picture before signing on the dotted line.