The most common length of time for a mortgage loan is 30 years. In fact, unless the borrower mentions something different at the time of application this is almost always just assumed to be the term desired by Mortgage Loan Originators.
The 30-year fixed mortgage was a concept developed in the 1930’s immediately after the great depression. It was implemented as a way to get the economy back on track and help individuals purchase homes who would not have been able to previously.
Prior to this system most mortgage terms were less than five years and had a balloon payment at the end of them which prevented many people from being able to afford property.
Despite being pioneered in the early 20th century, the 30-year fixed mortgage still boasts many current benefits/advantages over other loan terms. Generally speaking, the 30-year mortgage is still the longest term length most traditional lenders are willing to offer for residential properties (with the exception, that there are some 40-year fixed options but they are rare and more costly).
As a result, the 30-year mortgage term is best suited to maximize a borrower’s ability to qualify. The only tangible benefit of taking a mortgage with a shorter term is that the interest rate will be lower. You will pay off the loan faster with less interest over time but you will have a higher monthly payment.
It might sound like a great idea to match your mortgage term to whatever the maximum qualifying amount will be for the property you are looking to purchase to optimize your rate. While this can be a reasonable strategy, it is worth considering the flexibility the 30 year mortgage term offers.
It can be hard to predict a decline in income due to a job loss, a slowdown in business, or other factors that can affect personal finances. Having some “wiggle room” in the budget to ensure you can make on-time payments might be worth the slightly higher interest rate. You always have the option to make additional payments if you want.
Another feature of the 30-year fixed mortgage term is that it is a sweet spot for amortization. This can be seen by evaluating the difference in total monthly payments when comparing a 30-year fixed mortgage to a 20-year fixed mortgage or a 40-year fixed term to a 30-year term.
For example, the difference between a 500,000 loan at a 5.00% rate between a 20-year term and a 30-year term is approximately $616/month, whereas the difference between a 40-year and a 30-year is only about $283/month.
If a loan term becomes too long there is a diminishing return on the correlation between monthly payments and how much interest is paid over the term of the loan.
The length of your mortgage loan term is a feature of your loan. If you have further questions, please contact our office to speak with one of our Mortgage Loan Originators at (760) 930-0569.
