Selecting the mortgage term that is right for you can be a challenging proposition for even the savviest of homebuyers, as terms typically range from six months up to 10 years.
By understanding mortgage terms and what they mean in dollars and sense, you can save the most money and choose the term that is best suited to your specific needs.
The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate. And, a shorter term generally means a lower corresponding interest rate. While this generalization may lead you to believe that a shorter term is always the preferred option, this is not always the case. Sometimes there are other factors
If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you will be able to afford your mortgage payments should interest rates increase.
By the end of a five- or 10-year mortgage term, most buyers are in a better financial situation, have a lower outstanding principal balance and, should interest rates have risen throughout the course of their term, will be able to afford higher mortgage payments.
If you are shopping for a mortgage for an investment property, you will likely want to consider choosing a longer mortgage term
As well, if you know you will not be staying in the same home for the next five or 10 years, opting for a shorter term can save you significant fees when it comes to early payout penalties.