Do You Have to Get a 30-Year Mortgage?

You have found your dream house and can’t wait to start your new life — but you probably aren’t as excited for the monthly payment part. For many people, becoming a homeowner means taking out a mortgage. But figuring out which mortgage is best for you can be tricky. You will hear a lot of buzzwords like interest rates, monthly payments and principal. But there are other factors to compare with as well. Here’s some help to figure out how to pick the right mortgage term that fits your situation.

Your Options

This is not just a question of how much mortgage you can afford in your monthly budget, but how many years you are willing to pay before the home is yours free and clear. Most homebuyers go for a 15-year or 30-year fixed-rate mortgage term, but your payments and interest add up differently depending on which you choose. These are often the most practical when you plan to stay in your home indefinitely and prefer a locked-in rate that will remain the same for the duration of your loan.

There are adjustable-rate mortgages as well, though we won’t go in-depth into those loans here. (Here’s a good explainer on the difference between a fixed-rate and adjustable-rate mortgage.)

When you are trying to decide between a 30-year mortgage or a shorter term, it’s a good idea to calculate the overall costs for all options and think about what is more feasible for your budget. A shorter-term fixed-rate mortgage will mean you pay less overall, thanks to interest, but your monthly payments will be significantly higher.

Short-Term Benefits

By taking on a 10- or 15-year mortgage term, you will pay less interest over the life of the loan. However, borrowers with a short-term mortgage have to pay the loan off more quickly. This may seem like a negative because it means you will pay more each month, but also helps you build equity faster than other homeowners. This option is usually better for buyers of less-expensive homes and those who are refinancing without extending the term even further. It’s a good idea to think about your job situation and be sure your career and salary are somewhat stable so that what you afford now will be what you can afford throughout the full term. You should also consider how higher payments will affect progress on the rest of your financial goals — like saving for retirement or a child’s education.

When You Should Think Long Term

The other common mortgage type spans 30 years. Interest rates are sometimes higher because there is more risk for the mortgage lenders to stretch repayment over such a long period. This does give you more wiggle room when it comes to saving for other financial goals and will help you get more bang for your buck when it comes to tax benefits since you can claim the mortgage interest deduction longer. You will also have the option to prepay your mortgage if your finances suddenly improve (it’s important to check that there isn’t a fee for doing this). Thirty-year fixed rate mortgages are usually best for borrowers who plan to remain in their homes for a long period of time and enjoy the security of knowing their monthly payment will never change.

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As with most credit products, your credit scores will play a big factor in whether you’re approved by a lender and what interest rate you’ll qualify for. You can check your credit scores for free on Credit.com to see where you stand.