Track the Tradeoffs: Should I Get a Shorter-Term Mortgage or a Lower Monthly Payment?

Although the recent historical lows have slowly become their own version of recent history, the current rates are still very much below where they have been for quite some time. These rates can make a refinance or new home purchase well worth it. However, the rates also bring a new choice into focus: opting for a shorter term mortgage or a lower monthly payment with a longer-term mortgage. The choice may not be as clear cut as you think, as several factors can make one choice a better option in one case, but perhaps a slightly worse option in another.

There may be more than one option that enables you to win, so it’s a good idea to consider all of the options and perhaps speak with a qualified mortgage professional to make a final selection.

Opting for a Shorter-Term Mortgage

Interest rates have been extremely low for a short while now. These low interest rates have made it a little more difficult to choose between term length. Suddenly a refinance may offer a shorter term length at a monthly payment that looks very similar to your previous mortgage at a higher rate.

A 30-year commitment can seem like an eon, and a 15 or 20-year option can shave a lot of time off the mortgage clock and save you money over the life of the loan. However, even with interest rates low, the payment may begin to creep up into taking an ever-larger portion of your household income. This is why it is very important to know your budget. If you’re refinancing a mortgage, this question is a little easier since you may already have a baseline payment to compare at a higher rate. 

If you’re purchasing a new home, it is important to understand what you can afford and how much your payment will ultimately cost you. Afterall, even a few hundred dollars a month can mean a big difference between comfortable and concerned.

The good news is that a shorter term means that you will be free of a mortgage payment sooner rather than later. But this ultimate goal can be accomplished with other means as well. However, if you know you may be tempted to otherwise spend the money you’d save, a shorter term payment will lock you into paying off the mortgage sooner.

Choosing a Lower Monthly Payment

Opting for a lower monthly payment can make sense in many cases. A loan financed at 1.5%-2% lower than the previous mortgage will recoup a significant savings when you’re talking about such a large monthly payment. This is money that can be repurposed for college, home improvements and repairs, and just about anything else. Otherwise, if you’re unsure of expenses associated with a new home, the longer term can give your budget a little more breathing room to handle all of life’s surprises.

The good news about a longer-term, lower monthly payment mortgage is that you are not locked into paying the mortgage off in 30 years. You can use a wide variety of strategies to save years’ of interest on the loan by paying additional principal. Always remember to check for any prepayment penalties, but these do not tend to be too common. Here are a few strategies that you can use to pay your mortgage off sooner:

  • Calculate and pay the equivalent of your 15-year mortgage term. Making payments at this rate ensures a shorter race track for paying off your loan, but you retain the ability to redirect the money if you have an emergency.
  • Tack on an additional principal payment with each monthly payment. Choose a set amount or calculate a goal based on an amortization schedule. The possibilities and methods are almost endless.
  • Make a bi-weekly mortgage payment. Paying your mortgage every two weeks will help you make an additional mortgage payment every year in total. 13 payments compared to twelve will help you pay off your mortgage quicker.

The lower monthly payment can give you the bandwidth to increase your payments toward the principle, but keep you from locking in the money each month should you need it elsewhere. 

No Choice is Wrong

At the end of the day, whether you opt for a shorter-term mortgage payment or a longer-term, lower monthly payment mortgage largely depends upon your personal circumstances and goals. Opting for a shorter term mortgage may make sense if your payment will be closer to a previous payment or is well within your budget. Opting for the lower monthly payment will make more sense if you need the money for other things or would like to remain more flexible in what you would like to pay back each month.

If you are still unsure of what to do, then speak today with one of our mortgage brokers to see which option is best for you. We have experience working with many clients just like you, and we can offer advice on the best mortgage option available for you.

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