How Different Mortgages Loan Lengths Work

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Feb 02 2010

If and when you decide to become a homeowner, your house will likely be the biggest purchase you ever make, so it’s a good idea to learn all you can about the various mortgage lending options out there. After all, educating yourself about various types of loans is perhaps the best way to keep yourself from being victimized by a predatory lender.

Life of the Loan

Fixed-rate mortgages come in a variety of lengths: 15-year, 20-year, 30-year and even 40-year, though 15-year and 30-year tend to be the most common. Naturally, each has advantages and disadvantages.

  • 15-Year Mortgage: These loans have the obvious advantage of being short—you’ll own your home in the shortest amount of time possible, assuming you make all your payments on time. Plus, you have a good chance of having both a lower interest rate and less time for the interest to accrue, meaning your loan will be significantly less expensive. The main disadvantage here is that your monthly payments will be higher than with a longer-term loan, which means an unexpected expense could throw a wrench in your home ownership plans.
  • 30-Year Mortgage: These loans tend to have lower monthly payments than 15-year loans, but higher interest rates. Plus, the interest will accrue over a longer period of time, meaning you’ll pay significantly more for your house. However, you’ll have the option of overpaying your mortgage every month that unexpected expenses don’t get in the way, which, in the long term, could mean substantial savings.
  • 40-Year Mortgage: Some lenders may claim that this is the “new normal,” but 40 years is probably too long to stretch a home loan. If you can’t afford your home in 30 years, it’s likely too much home for your budget.

The post at FiveCentNickel.com goes on to crunch some actual numbers to give an idea of what your options might be in a real life situation, and it’s worth a look to see the potential costs of buying a home spelled out.

When you do find yourself in the market for a house, though, keep in mind that the financial meltdown that led to the current recession began in the real estate market. There are a lot of complex mortgage products still on the market, which means you must do a lot of research before committing to one or risk losing your investment to foreclosure.

Additional Resources

Dreams Foreclosed (PDF)

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