Getting a Mortgage? on What Term?

Many people automatically obtain mortgage financing that amortizes over thirty years.  Amortize, according to Wikipedia, “is the process of decreasing, or accounting for, an amount over a period of time. The word comes from Middle English amortisen to kill.”  Basically, applying it to a mortgage, it means the terms for killing off that huge debt to which you just obligated yourself. That’s a nice thought – killing your mortgage, right?  Now, consider the basic question - how long are you going to be hacking away at this debt?

Typically, as aforementioned, the most common loan term is for 30 years.  But also quite common is the 15 year mortgage.  What’s the most obvious difference?  In basic terms, it’s the payment itself.  The loan that amortizes over 15 years costs you approximately 20% to 25% more out of pocket per month.  That difference oftentimes is where the buck stops.  It’s a matter of affordability.

However, if the numbers work for you, a 15 year mortgage has its added attractions.  In a nutshell, you pay less interest over the period of the loan, so it’s less out of pocket at the end of the day (or mortgage, in this case).  Over fifteen years, this time reduction can result in considerable savings.

There’s another solution to this dilemma. However, it requires personal discipline.  You can obtain a 30 year mortgage, figure out what extra principal payments to make each month, and pay it off in 15 years.  This situation works for a lot of people.  For instance, if your monthly income is inconsistent, it’s a great plan.  Say you consistently make $60,000 annually, but you get the majority of your income only two times a year.  Obtaining a fifteen year loan, although affordable on paper for you, doesn’t pan out realistically.   Yet, if you’re disciplined, you can plop down a big principal payment when the money is flowing those couple of times a year.  That way, you’re not backed into a corner to always have to cough up the higher payment.  This scenario works for some people quite well.

There are other loan terms besides 15 or 30 year mortgages.  There are 10, 20 and 40 year mortgages, too.  However, they are not as common.  The reason they aren’t is because of the very fact that they are uncommon.  You see, the secondary market wants to sell loans into pools of other loans similar in interest rate, type and amortization.  Since there aren’t a lot of these “diffent’ type amortizing loans, the appetite to buy them isn’t as evident.  And if no one is hungry for the item on the menu, you either don’t carry a lot of it, or you price it a bit higher for the rare, discriminating palate.

But again, you can always choose a 30 year mortgage, and pay it off on a shorter schedule to suit your own personal needs.  What you choose to do need only make sense to you.  You may qualify for a 15 year loan, but only be comfortable with a 30 year loan.  Only you can say.  However, if it is easily affordable, then the chance to build your equity more quickly may be a deciding factor.