While purchasing a home is a serious financial decision, it is also a decision that will affect a home buyer’s lifestyle for many years. Many will need to budget and save before making a home purchase only to continue doing so after the acquisition. With this in mind, there are 4 reasons why borrowers should use longer term mortgages:
Longer term mortgages with fixed mortgage rates offer borrowers a monthly principal and interest payment that will not change over the life of the loan. This stability allows homeowners to budget their finances for more than just a few years. The longer the mortgage term, the better the homeowner will be in the future if income increases along the way.
Long term loans are very affordable for home buyers because the loan is amortized over a longer period of time. While rates on a shorter term loan, such as the 15 year mortgage, may be lower, the potential mortgage payment can be higher than the 30 year mortgage because of the way the loan is amortized. Even though less interest is paid with a shorter term loan, the longer 30 year mortgage is usually more affordable for home buyers since the monthly mortgage payment is less.
3. The ability to prepay
Even though a homeowner has a longer term mortgage, there is still the opportunity to prepay the loan which will shorten the term and overall interest paid over the life of the loan. At any time a homeowner wants to make an extra payment for the principal amount of the loan, they can do so. This secures the long term loan payment while allowing to pay down the principal balance when possible without any penalties.
When borrowers opt for a longer term mortgage, they are securing their future. In the case of life events, the fixed rate is intact and the mortgage payment will remain the same. If mortgage rates fall, homeowners can refinance to lower rates. However, if they already have a low rate, they can just make some extra payments to principal without the expense of closing costs related to a refinance.
Longer term loans for home purchases and refinances have always been popular because homeowners like the security of having the lowest possible mortgage payment in order to free up money to use for other things. Being tied down with a shorter term loan and higher mortgage payments is not usually a benefit for homeowners with families who have other unexpected expenses. While longer term loans have always been popular, they will continue to be so since they help promote homeownership, as well as, a sense of financial security.