When you consider a mortgage to buy a home, one of the most important decisions you have to make is how long your loan will be. The 30 year mortgage fixed rate mortgage is the most popular loan program, but it’s not necessarily the right choice for everyone.
Here’s an overview of how mortgages work and why shorter terms like 20 or 10 years are sometimes better options than a traditional 30 year mortgage.
What Is A Mortgage
A mortgage is a legal document that gives the lender a lien on your home. In other words, it’s an agreement between you and the mortgage lenders that if you don’t make your monthly payments, they have the right to take your house away.
As long as you make those monthly payments (and keep up with any other obligations in the contract), it’s yours. However, if something happens and you can no longer afford to pay for it. The mortgage lenders can foreclose on your property and may sell it at auction to recoup their losses.
The Basic Types Of Mortgages
Mortgages are one of the most important financial products in the world. They allow people to buy homes, giving lenders a way to make money while taking risks. Mortgages are very complex, and there are lots of different types. But not all mortgages are created equal.
Fixed Rate Mortgages
Fixed rate mortgages are the most favored type of mortgage. They’re ideal for borrowers who plan to stay in their homes long term and want to be confident they won’t pay more than they signed up for when it comes time to refinance or sell.
These loans have a fixed interest rate for the life of the loan, which means once you lock in your interest rate, you won’t have to worry about rising interest rates affecting your monthly payment.
Fixed rate loans tend to be an excellent choice for borrowers concerned about the potential for rising interest rates, as well as those who plan to live in their home indefinitely or buy another house with substantial equity built up from paying down the principal balance over time.
Adjustable Or Variable Rate Mortgages
Adjustable or variable rate mortgages have lower interest rates than fixed rate mortgages, but they’re riskier. The interest rate on adjustable rate mortgages is tied to a benchmark such as the prime rate and can change at any time. This means you could pay more than expected if the market changes dramatically.
Moreover, variable rates are more expensive than fixed rates because you don’t know your monthly payment until the interest has been applied each month. Also, variable rate mortgages might have an initial low teaser period that lasts two or three years before increasing to a higher level. This can cause some buyers to fall into deeper debt than they intended when they took out their mortgage.
Many borrowers find that a hybrid mortgage is a perfect fit for them. A hybrid mortgage offers a lower monthly payment than a 30 year fixed loan but has a mortgage payment that adjusts every five years after the first five years. Therefore, your monthly mortgage payment will increase or decrease with each adjustment, and you’ll have to pay more each month as your mortgage ages.
However, compared to an adjustable rate mortgage (ARM), this type of loan can be easier on your budget because you’re getting all the benefits of a fixed rate while only being required to pay it for 10 years instead of 20 or a 30 year mortgage.
How Do I Get The Best Interest Rates On My Mortgage
There are many things to consider when shopping for a mortgage. If you just want the best interest rate possible, it may be tempting to go with the lender who gives you the lowest rate immediately. But if you have time before your loan is due and can afford to pay more interest over time, it might be better to shop around and see what else is available.
You can start by looking at multiple lenders (banks as well as credit unions) that offer different types of loans: fixed rate mortgages (FRMs), adjustable rate mortgages (ARMs), hybrid ARMs, shared appreciation loans, and private mortgage insurance (PMI).
Each loan type has its advantages and drawbacks, so make sure that any potential benefits outweigh the disadvantages before deciding which type of loan works best for your situation.
How Does My Credit Score Factor In My Interest Rates And Monthly Payments
There are a few ways your credit score can directly affect the interest rate you receive on your mortgage. If you have an outstanding credit score, lenders will be more willing to lend to you. This means they’ll likely be willing to offer lower rates and better terms because they know you won’t default on your loan.
If a mortgage lender is going out on a limb for someone with such good scores, they will charge less interest because there’s less risk involved in lending money this way.
On the contrary, if a lender doesn’t trust someone based on their low scores and poor history of paying off loans. In this case, they will be more hesitant to make another loan with them involved in any way whatsoever due to fears of defaulting. Thus, forcing them into charging higher rates and tighter monthly payments to avoid losing money if something goes wrong down the line.
What Is A Mortgage Loan Term
A mortgage loan term determines the time you have to pay back your mortgage. A 30 year mortgage means you will be paying off your loan for 30 years. A 20 year mortgage means you will be paying off your loan balance for 20 years, and so on.
Also, the time a borrower has to make monthly payments on their home loan can be called the amortization schedule. The difference between these terms is that a mortgage term refers to the entire period you must repay your home loan. In contrast, an amortization schedule refers only to a tiny part of this repayment period (typically the first few years).
How To Choose The Best Mortgage Loan Term
When deciding on a mortgage loan term, there are many factors to consider. For example, you should understand the pros and cons of different interest rates, loan types, and terms. Then you need to determine how long a mortgage term is suitable for your situation.
One thing that determines whether a 20 year vs 30 year mortgage would be better for you is how much money in interest payment will cost over time. The shorter the term length of your mortgage (30 vs 20-year mortgage), the higher the comparable monthly payment will be due to higher annual percentage rates (APRs).
However, suppose interest rates rise during that time frame. In that case, this could offset any savings from having less principal paid over time with a lower monthly payment because it costs more each month because of higher APRs.
The Benefits Of A 10 Year Mortgage
A 10 year mortgage can help you save money on interest. If you pay off your loan balance faster, you can take advantage of the same low interest rate for a longer time. You could also choose that option if you want to pay down other debts and save for retirement at the same time.
In addition to savings on interest, another benefit is that it will be easier to qualify with a 10 year mortgage. If your debt-to-income ratio is under 43%, then this type of loan will be more attractive (especially if those other types are 30 or 20 years).
Advantages Of A 20 Year Vs 30 Year Mortgage
A 20 year term is typically less interest than half the cost of a 30 year mortgage. This means that you can save thousands of dollars by paying off your home sooner and avoid spending on extra interest over the life of your loan. If you’re looking to refinance, it’s also easier to qualify for a 20 year vs 30 year mortgage because they have lower credit score requirements.
Another advantage is that with fewer years on your loan, there’s less money left to pay back at the end of the term. This means you’ll be able to afford higher monthly payments towards principal rather than interest (more equity).
This means that even if interest rates grow during this time frame, there won’t be any surprises or additional costs because all mortgage payments will reduce what’s owed instead of increasing what’s owed due to higher rates.
Advantages Of A 30 Vs 20-year Mortgage
With a 30 year mortgage, you’ll be paying less per month than a 20 year mortgage allowing you to get a more expensive home. If your budget is tight and you need to work within specific parameters, choosing a 30 vs 20-year mortgage loan can make homeownership more accessible.
In addition, if you’re planning on staying in your home for the long haul and want to know that it will be affordable even as interest rates rise or when your monthly income increases and expenses decrease (or vice versa). In this case, a 30 year mortgage may be the best choice for you.
What Is A 10 Over 30 Mortgage
You may be wondering what is a 10 over 30 mortgage in the real estate industry. It’s not a common type of loan, but it can be helpful if you’re looking to pay off your home in only three years while still getting an interest rate lower than what you’d gain with an FHA loan.
The basic idea behind a 10 over 30 mortgage is that you take out a 30 year mortgage, then pay it off in only 10 years. This lets you keep your monthly payments low and save on interest costs by paying off the loan balance quicker than usual. However, because of the short term, the bank will only give you an interest rate higher than what you’d get on an FHA or conventional mortgage.
Monthly Mortgage Payment Varies By Loan Term And Rate
The monthly payment you make on a home loan is determined by several factors. This includes the size of your down payment, the length of the term, and whether or not you have private mortgage insurance (PMI). While these variables don’t affect an interest rate directly, they’re all about how much money you pay monthly.
For example, the more money you put down as a down payment, the less risk your lender assumes in making the loan to you. This reduces their risk premium (the additional amount they charge over their cost of funds) and therefore decreases how much they need to charge on total interest rates.
Similarly, suppose you borrow less over a more extended time than more over a shorter time. In that case, that reduces your monthly payment because there’s less debt service each month. However, this will also increase how much total interest accrues over time due to compounding effects.
What Other Factors Affect My Required Monthly Payment
While the length of your mortgage affects your monthly payments, other factors can also affect your required payment. For example, property taxes and home insurance payments will increase over time. You may have to pay for maintenance and repairs on your house throughout the year on top of property taxes, which will be reflected in your monthly payments.
What Is The Role Of Mortgage Lenders With My Monthly Payments
A mortgage lender is a company or individual who provides you with a loan. When you apply for a mortgage, your lender will decide how much money you can borrow based on your monthly income, debt, credit score, and down payment. The lender also determines the interest rate applied to your monthly payments throughout the life of the loan.
As part of this process, lenders will determine whether it’s more appropriate for you to choose between a 30 year mortgage or 20 years when it comes to mortgage payment terms (or 10 if applicable). In some cases, they may even offer several options so customers can decide which fits best into their lifestyle and budget.
Selecting a mortgage term is one of the most important decisions when buying a home. A mortgage loan term is simply the length of time you have to pay off your mortgage in full.
If your interest rates are high, opting for a 10 over 30 mortgage might make sense, so you don’t pay as much interest over time. This could be especially true if you can afford higher monthly payments (which might not always happen).
However, if your interest rate is lower and/or doesn’t hurt too much financially each month, go for longer terms because they’ll save money over time. Make sure both parties understand this decision before signing anything.
If you’re looking for a new house or selling your current home, make sure you consult with a trusted real estate agent at HOMES by ARDOR. With years of experience in the industry, they can definitely help you find the right loan for your needs.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.