Whether you buy a house or refinance your current home, you can assume that your financing choices with a fixed-income home loan are limited to a term of 30 or 15 years. While these are the most popular loan choices according to the Mortgage Bankers Association (MBA), many lenders offer mortgage loans for almost every loan period you choose.
The MBA says that 15% of all refinancing mortgages were homeowners for non-traditional conditions in June 2012, while only 2% of home purFinder Mortgages were for non-traditional loan conditions. In fact, 85% of purchase loans consisted of 30-year fixed-rate loans.
If you are considering refinancing, a non-traditional mortgage condition of 20, 10 or even an eccentric period of 17 or 23 years can be attractive because you can extend the payment of your loan to a certain date, such as your pension or what would be the payment date of your original 30-year loan.
Loan term options
Adjusted loan conditions are available as long as mortgage loans exist, in particular from small community banks and credit unions. Nowadays some larger mortgage lenders have jumped into offering individualized mortgage loans. Quicken Loans, for example, advertises heavily with its “YOURgage” program, which allows borrowers to choose a loan period of 8 to 30 years with a fixed interest rate. These loans are available for $ 25,000 to $ 417,000. If you are a homeowner, you can refinance up to 95% of your home value and if you are a buyer, you can buy a home with a down payment of only 5%.
Although adjusted terms of, for example, 7 or 17 years are not always available at the larger financial institutions, some lenders such as Finder Mortgage offer fixed-rate loans for 10, 15, 20, 25, 30 and 40-year terms .
Shorter loan terms and alternative loan terms have become more popular in recent years for two reasons: First, extremely low interest rates make monthly payments to shorter mortgages more affordable for borrowers. Secondly, the recession and the scary levels of unemployment have led many consumers to embrace the concept of eliminating all debts, including mortgages.
Why choose an alternative loan period?
There are several reasons why you might want to choose an alternative loan period:
- Less interest . Shorter loan terms tend to be more popular when refinancing homeowners rather than buyers. This is because these homeowners have been paying off their loan balance for several years and want to stay on track to pay off their home within the original timeframe of their first loan – usually 30 years. If you have a 30-year mortgage and have been paying for 11 years, you may not want to use a 30-year loan again because you will pay interest and pay the mortgage for much longer. You can save thousands of dollars in interest payments with a shorter loan period and use that money for other investments.
- Handy payout date . In addition to adhering to your mortgage planning, you may want to consider a different loan period so that your payment date matches your retirement date or when your child starts studying. Some refinancing homeowners want their new loan to end when their original loan expires and therefore switch to a 20-year mortgage if they have had their current loan for 10 years.
- Budget restrictions . Both buyers and homeowners can choose a customized loan term to find the best fit between their home budget and their mortgage term. For example, if the payments are too high with a 15-year loan, they may be payable on a 20-year loan, even if the interest is slightly higher.
How to choose a loan period
Whether you are a buyer or a refinancing homeowner, your loan period must be taken in the context of a financial plan. Determine how much you can afford to spend on your monthly mortgage payment before you start discussing loan options with a lender. Even if a lender says you can qualify for a larger mortgage or a shorter-term loan, you may have other ways in which you would rather spend your money.
Then consider how long you plan to stay at your home and what your future spending needs are for children, college, or retirement. Even if you plan to sell your home within five to seven years and want to keep your monthly payments low, keep in mind that with a shorter loan you can build up shares more quickly and therefore generate greater profits if you sell.
Compare loan functions
You have to compare your loan options in different ways:
- Interest rates and costs . Some lenders offer alternative loan terms for a higher fee than standard loan terms, so make sure you know how much you have to pay before choosing a specialized loan period. The interest rates are lower on short-term loans, but the spread between them changes as often as the mortgage interest rate changes. Typically, the difference between a 30-year loan and a 15-year loan is greater than the difference between a 20-year and 15-year loan. Your lender may charge the same interest rate for a 20-year loan and a 23-year loan, so make sure you compare all possible borrowing conditions before you decide which one works for you.
- Amortization . Your lender can draw up amortization tables for different loan conditions and rates to show you the principal and interest at various points in your loan. With a shorter loan period you start paying your principal faster; In the first few years of a 30-year fixed-rate mortgage, however, your payments are almost entirely interest. A repayment table can show you how much less you would pay in interest if you opt for a shorter loan period.
- Monthly payments . Your monthly payments vary greatly according to your loan period. Typically, your mortgage principal and interest payment are higher with a shorter term loan, but because the interest rates are lower on those mortgages, the payment may not be as high as you think.
Consider a $ 200,000 mortgage by comparing 30-year and 10-year loan terms. On a 30-year mortgage of 3, 37%, your monthly principal and interest would be $ 884, while your monthly principal and interest on a 10-year fixed-interest loan at $ 2, 75% would be $ 908.
After five years, the loan balance on a 30-year loan at that rate would be $ 178,610, as opposed to $ 105,193 for the ten-year loan. You would save $ 89,280 in interest payments by choosing the 10-year mortgage because of the lower interest rates over the shorter term of the mortgage.
Remember, while paying less interest is a good thing, and if you shorten your loan period, you can pay off your mortgage faster, your mortgage interest deduction is lowered and eventually disappears. Make sure you plan higher taxes if you choose a shorter loan period.
When choosing a loan period, bear in mind the importance of other financial goals, such as paying a credit card or debts from student Sara Monday and saving for school or retirement. Also keep in mind that you need the income to be eligible for the higher loan payments associated with a shorter-term loan, so you may not be approved for a short-term loan if your debt-to-income ratio does not comply with the guidelines from the lender. You can always ensure that you pay off your mortgage earlier by voluntarily paying extra on the principal.
How long is your mortgage loan term? Do you wish you had chosen a different term?
Travel the world for free using customer loyalty programs
Do you think you have to travel often to get frequent flyer miles? Think again. In the 2004 movie, Punch Drunk Love, Adam Sandler plays a quirky character who finds a way to earn millions of frequent flyer miles without leaving home to travel with his lover. He realizes that there is a promotion to earn frequent flyer miles with every purchase of Healthy Choice pudding