Determining a length for your mortgage will depend on many factors, including your current financial situation and your goals for the future. You will need to consider how much you can afford to spend each month while still maintaining a comfortable amount of cash reserve in the event of an emergency. You will also want to continue saving for retirement and for other important goals such as college tuition for your children or perhaps to buy a new car or for other purposes.
Most frequently the decision will be between getting a 15- or a 30-year mortgage. While there are some 20-year mortgages, 15- and 30-year fixed interest mortgage loans are by far the most common. Find out more on Choosing the Best Mortgage Loan.
Taking a shorter-term mortgage will make your monthly payments considerably higher, meaning you will have less disposable income. Conversely, a longer-term mortgage means you will pay more money in interest over the life of the loan, but you will have lower monthly mortgage payments and more money to spend elsewhere.
Here are a few pros and cons of each type of loan to consider when deciding which length of loan is best for you.
- Lower monthly payments
- You will have more money available to save, invest, or spend
- Greater flexibility, meaning you can pay more to shorten the life of the loan when you have extra money, but are not committed to the higher payments.
- More tax benefit, because you are making interest payments over a longer time frame
- Easier approval
- You can afford a bigger house
- Higher interest rates
- You will pay more money over the life of the loan — possibly twice as much as you would with a 15-year loan
- Takes longer to build up equity
- Loan is paid off sooner
- Lower interest rates
- You will build up equity faster
- You will pay much less over the life of the loan
- Higher monthly payments
- Harder to get approval
- Less tax benefit
- Less purchasing power
You can always refinance and change from one time frame to another. Should You Refinance Your Mortgage? If, for example, you are earning more money five years into your 30-year loan and can now afford to pay more each month, you can refinance at a lower interest rate with a 15-year loan. Or, if interest rates are similar to those that you are paying, you can simply pay more provided there is no prepayment penalty. Conversely, if you are having a hard time paying off a 15-year mortgage in a tough economy, you can refinance for a longer-term loan and make it easier on your family financially from month to month.
In the end, you should weigh all of these factors along with your personal financial situation and choose the length of a mortgage loan that is best for you.