The Bottom Line: Shorter Or Longer You Have Many Choices
When it comes to mortgage terms, 15-year mortgages are perfect for those with the income to make the higher monthly payments. But just because youre not ready to commit to a 15-year mortgage now doesnt mean you cant enjoy the benefits that come with paying your mortgage off earlier.
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The Extra Costs Of Long Term Mortgages
However, lowering your monthly mortgage repayments doesnt add up to overall savings.
Using the example above, over 25 years youll actually repay nearly £249,000 by the time youve repaid the initial debt. Thats £76,000 in interest.
Increase the term to 30 or 35 years and youll spend an extra £16,500 or £34,000 respectively over the full term youve borrowed the money.
When Does A 15
A 15-year mortgage payment is what a lot of financial specialists promote. My opinion is there only are a few circumstances where it makes the most sense.
People That Have a Hard Time Managing Money
If a person has a difficult time not spending money and saving, a 15-year home mortgage may be a good candidate. I am a believer that people can change with the right mindset, knowledge, and practice. But maybe not all people can change very quickly. The approach to have with a longer mortgage is to try and pay it off early. A person that does not have the discipline to try and obtain this goal should probably not take a 30-year mortgage if they have the means to pay it off in 15 years.
The right person for a 15-year mortgage would not only be a person that is bad at saving and managing money but one that has a stable income and a good emergency fund. Even a person that is bad at managing money, can have a life event happen that would derail them from the 15-year mortgage payment.
This type of person seems to be strange, doesnt it? The type with money, bad at saving, and has an emergency fund established? If they are bad at saving how can they have money saved? Also, if a person is not good at managing money how could they have the means to pay on a 15-year mortgage loan? It does seem odd at least to me, but strange situations do occur.
Builds Equity Fast
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How Much Faster Do You Pay Off A 15 Year Mortgage With Biweekly Payments
Biweekly payments accelerate your mortgage payoff by paying 1/2 of your normal monthly payment every two weeks. By the end of each year, you will have paid the equivalent of 13 monthly payments instead of 12. This simple technique can shave years off your mortgage and save you thousands of dollars in interest.
The Cost Of Choosing A Longer Term
As you can see, it can be significantly more affordable in the short term to take out a longer mortgage.
The big problem is that itll take you longer to pay off the loan and youll pay more in interest.
The tables above show that for every five years you add on to your term, you pay off around £2,000 less during the initial two-year period.
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Comparing Fixed Mortgage Rates: 20
Home buyers like longer-term mortgages such as 30-year and 20-year loans because they historically have come with lower interest rates. And a lower interest rate will reduce the size of your monthly mortgage payment.
The average interest rate on mortgages has fluctuated over the years. Freddie Mac data show that the average annual interest rate on 30-year fixed-rate mortgages hit its highest level in 1981, when it stood at 16.63%. Compare that to today: Freddie Mac said that the average rate on a 30-year fixed-rate mortgage was 3.04% for the week ending April 15.
No one can predict whether interest rates on either 30-year or 20-year fixed-rate mortgages will rise or fall in the coming months. Whats important to remember is that even if they do rise or fall slightly, mortgage interest rates today remain extremely low historically.
Great news! Rates are still low in 2021.
Missed your chance for historically low mortgage rates in 2020? Act now!
Should You Choose A 15
Theres a good reason that 30-year mortgages are typically the more popular choice for homeowners they come with lower monthly payments and can provide more purchasing power. While 15-year mortgages do have some advantages, especially when it comes to paying less overall interest, the higher monthly payments may be difficult for most borrowers to swallow.
However, if you do end up with a 30-year mortgage, its a good idea to try to make extra payments on your loan each year if you can. You can either plan out a faster overall payment plan or just make an extra payment whenever you have the money. Either way, those extra payments will help you save on interest, pay off your mortgage quicker and potentially give you the best of both worlds.
Reason No 4 To Avoid A 30
A final reason to avoid a 30-year mortgage may seem rather obvious: because it lasts 30 years. That might not seem problematic when you take out the loan, but consider your age and your retirement plans. If you’re 52 years old and you’re considering taking on a 30-year mortgage, note that you’ll be 82 when you finally pay it off — if you make only your expected monthly payments. Most retirees would rather not have mortgage payments hanging over their heads when they’re on fixed incomes.
Which Is Right For You
It might be appealing to stretch your payments out over 30 years if you’re concerned about your monthly cash flow, and you might not be approved for a 15-year mortgage in any event. Lenders approve your loan application based in part on your ability to repay it. They compare your monthly income to your monthly debt payments. This is your debt-to-income ratio, and it might disqualify you for a 15-year loan.
You’ll get a lower interest rate and pay less interest overall over the life of the loan.
You’ll build equity in your property more quickly.
Your mortgage is less likely to be underwater if you’re forced to sell.
Your monthly payments will be higher because you’re squeezing all that principal into a shorter term.
Making higher mortgage payments might prevent you from saving for things like retirement or emergencies.
You’ll be at risk of default and foreclosure if life throws you a curveball that prevents you from meeting your higher monthly payments, such as a job loss or illness.
The graph below illustrates the difference in principal and interest rates in 15-year and 30-year mortgages.
Other, less-noticeable differences are also significant.
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The Longer Your Mortgage Term The More You’ll Pay
As well as choosing the length of your introductory deal, you also need to choose how long the mortgage will run for. It’s an important factor, and it’s often overlooked.
Most people plump for 25 years but it doesn’t have to be that long. Alternatively, you can have it for 30, 35 or even 40 years. A shorter mortgage term means higher repayments, but less interest overall. But there’s a couple of factors to take into account when you choose:
- How old will you be when the term ends? Some lenders won’t allow you to take it into your retirement period, while others will. Age is an important consideration, as you have to question whether you could you keep up with the repayments.
- The longer it is, the more you pay. Lengthening the term to, say, 35 years, means your monthly repayments will be smaller, but what you pay overall in interest will be greater. Shortening the term is a bit like overpaying, it’s far cheaper if you’ve got the cash. However, if the mortgage allows you to overpay, better to keep the mortgage long to give yourself flexibility, then make overpayments.
Try using our Mortgage Best Buys to see how changing the length of your mortgage term will affect your payments.
Is It Better To Get A 15year Or 30year Mortgage
For many, a 30year fixedrate mortgage loan is the ideal product. Thats because, quite simply, it allows for more affordable monthly payments. The downside is, it can take longer to accumulate equity and pay off your loan.
Thats why some homeowners opt for a shorter loan term in the form of a 15year mortgage.
You can pay off the loan twice as quickly, over the life of the loan you pay much less in interest, and you grow home equity at a much faster rate, says Robert Johnson, professor of finance at Heider College of Business, Creighton University.
That doesnt mean that a 15year loan is always the best choice, however.
The main drawback to a 15year mortgage is that monthly payments are much higher since you have to pay off the same amount in half the time. As a result, many homeowners simply cant swing the monthly payments.
Its up to you and your loan officer to compare the costs and potential savings of a 15 vs. 30year mortgage, then chose the right one for your financial situation.
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Match The Average Length Of Stay
Some of you might be thinking that taking out a 5-10/1 ARM is too risky. You plan to live in the property for much longer. If you think youre going to live in your house for much longer than 10 years, the data shows otherwise.
The average duration one lives in and owns a home is about 10 years in 2021. Therefore, taking out a 30-year fixed rate mortgage makes little sense. Not only will you be paying a higher interest rate, but youll also likely sell your home or maybe even pay off your mortgage in under 10 years.
A 21.5-year overestimation of ownership is a serious miscalculation based on the data at hand. Even if you end up owning your home for longer than a 10/1 ARM, you still have plenty of time to pay down more debt before the interest rate resets, refinance your mortgage, or set aside more money for potentially higher monthly payments.
If you plan to live in your house for 10 years, taking out a 10/1 ARM is the most ideal loan duration. A 10/1 ARM is usually between 0.25% 0.5% cheaper than a 30-year fixed-rate mortgage.
Heres what I did with some of my mortgages since 2003:
A) Took out a $435,000 mortgage in 2003, refinanced it multiple times to a lower rate, and paid it off in 2015
B) I then took out a $1,220,000 mortgage in 2005, refinanced it multiple times to a lower rate, and paid it off in 2017 by selling the property.
C) I then took out a $568,000 mortgage in 2007, got a free loan modification in 2010, and will pay off the remaining balance by 2023.
Should I Get A 2 3 Or 5
Knowing which fixed rate mortgage to go for in the UK in 2019 is something that takes a lot of thought if youre not an expert in the area. When youre considering a 2, 3 or 5 year fixed rate mortgage the main points to consider are:
- What mortgage interest rates are available for 2, 3 or 5-year fixed rate mortgages?
- What are your finances like?
- Do you prefer to know what your outgoings are for a longer period of time, like 5 years?
- Are you comfortable with a little financial risk?
- Is it more important to have lower outgoings now that could rise in just 2 years time?
- What is the BOE interest rate outlook?
- Will interest rates begin going up soon?
- Are mortgage interest rates still notably low?
- How likely are your circumstances to change?
While you will know the answer to many of those questions, you wont know them all. This is where an expert mortgage advisor can help. Even if you think you dont like uncertainty, a conversation with an advisor might reveal you dont mind a small risk and that a 2 or 3-year fixed rate mortgage would work better for you.
They can also help you consider your personal situation in relation to your mortgage. If youre likely to change jobs, careers or have a baby or get married, then these details all affect how long a fixed rate mortgage would be best for you.
If youre unsure which mortgage product is the best fit for your needs and circumstances make an enquiry and well introduce you to a whole-of-market broker who will be able to help.
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Which Fixed Rate Mortgage Period Is Best
Knowing if a 2, 3 or 5-year fixed rate mortgage is best depends on a number of different details. Ultimately, even if interest rates are falling, agreeing a longer fixed-rate mortgage such as a 5 or 10-year deal could work best for you due to your attitude to finances and your personal situation and the broader UK backdrop, including Brexit uncertainty.
Likewise, even if rates are rising and the costs associated with 2 and 3-year fixed rate mortgages are much better than 5 or 10-year fixed rates, the shorter term option may be more suitable due to your future plans.
Its worth pointing out that while 2 and 5-year fixed rate mortgages have been popular in recent times which doesnt necessarily mean they are better, even for first-time buyers the certainty and lack of regular new mortgage arrangement fees have helped encourage more homeowners to agree 10-year fixed rate mortgages. However, thats not best for everyone.
We should also say that while there are 3 year fixed rate mortgage deals available, youll struggle to find a 4-year fixed deal in the UK in 2019.
Monthly Savings From Longer Mortgage Terms
Lets assume youre buying a £250,000 property at a rate of 3% and have a 30% deposit. Borrowing £175,000 over 25 years would cost you £830 a month. Adding an extra five years brings the monthly repayment down to £738, while a 35-year mortgage would only cost £673 a month. Thats £1,104 or £1,884 less each year.
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Can Older Borrowers Get Long Term Mortgages
Some lenders will only offer mortgages that you will pay off before retiring. Others state that their mortgages have to be paid off before you reach a maximum age.
This means that older borrowers will only be able to get short term mortgages with these lenders. Here is how to find a mortgage when you are older.
How Much Could You Save By Choosing A Longer Term
With house prices still out of reach for many first-time buyers, lenders are increasingly offering maximum mortgage terms of 35 or even 40 years.
And a longer term certainly results in lower monthly costs.
Weve crunched the numbers and found that you can save as much as £100 a month by choosing a 30-year term rather than a 25-year term.
The tables below show that at 90% loan-to-value , adding an extra five years can shave off £98 a month, or £101 at 95% LTV.
Stretching the term to 35 years saves a further £70 a month taking the total saving to around £170.
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Whats A Disadvantage Of Getting A 15
The only downside to a 15-year mortgage compared to a 30-year mortgage is that it comes with a higher monthly paymentbut really, thats a good thing!
With the higher monthly payment of a 15-year mortgage, more of your money will go toward paying off the principal amount of your loaninstead of getting thrown away on interest.
Thats how the 15-year mortgage allows you to pay off your loan in half the time compared to a 30-year mortgageand avoid a mountain of interest payments.
What Does Arm Stand For Mortgage
Adjustable-rate mortgage A mortgage that does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index. ARMs usually offer a lower initial interest rate than fixed-rate loans.
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Can You Pay Off Your Mortgage Early
In most cases, homeowners can pay off their mortgage early, provided you follow certain ground rules and make sure the terms of your loan.
The first step is to recognize how your payment works. Early in a 30-year loan, the bulk of the payment goes toward loan interest. As the loan is closer to completion, the bulk goes toward the amount you borrowed, or the principal. But if the principal is lowered through extra early payments, the interest paid also is lowered. Paying down principal in the long run will reduce the total interest paid on the loan.
The more the principal is paid, the more the homeowner builds equity in the home. To easily figure the equity, calculate a fair price you feel the home is worth then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.
When considering paying the mortgage early, be sure you know the answer to a question that many, especially first-time homebuyers, often do not consider: Is there a prepayment penalty on your loan? Many lenders do not have this penalty, but those that do will charge for making early payments. If you have any uncertainty, call your lender to ask specifically about prepayment penalty.
Once that question is answered, be sure to tell your lender if and when you make extra payments that you want that money applied to principal.