Mortgages offer many options for homeowners, with varying interest rates, amortization, fees, and monthly payment amounts. You need to find the mortgage that works best for your unique situation, whether your goal is a lower payment, lower interest rate, or paying the loan off as soon as possible.

How Long Is a Standard Mortgage?

Mortgage, Money, & a Piggy Bank
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While real estate loans, or mortgages, can be for 10 to 50 years, close to 90% of mortgages are the standard 30-year term with a fixed interest rate. Terms of 15 years are common, while some may choose to extend their loans for 40 or 50 years. Balloon mortgage terms can be as low as two to seven years, followed by a balloon payment of the loan’s balance in full. A balloon mortgage may be an attractive option for people who plan to renovate and build quick equity or stay in the home for just a few years.

While 30 years is the most common term, most mortgages are refinanced or paid off through selling the home in about 10 years.

Which Terms Work Best for Your Situation?

The ideal mortgage will vary depending on your budget, future plans, and needs. Some home buyers may seek to stay long-term, while others may plan to stay for a shorter amount of time or renovate and resell. The interest rate and payment amount are also key considerations. A 30-year fixed-rate mortgage is the benchmark type of loan for comparing interest rates and monthly payment amounts. The 30-year term provides a lower monthly payment, including paying more total interest. This type of loan is especially attractive to first-time homebuyers.

Fixed 15-year mortgages are helpful for those who want to pay off the loan sooner and limit the interest paid. Homeowners build equity faster through a loan of this term. The payment will be higher, a factor that needs to be considered when creating a budget, but the interest rate will be lower.

Some fixed mortgage terms are customized for the borrower, often at 20 years. Fixed-rate mortgages with 20-year-terms are available in conventional loans as well as those secured by the Department of Veterans Affairs or the Federal Housing Administration. Mortgages with terms of 20 years have lower interest rates and higher payments than ones with 30-year terms.

Extended mortgages with 40- or 50-year terms have lower monthly payments and offer buyers more purchasing power. The index and the margin determine interest rates, and the interest paid over the term will also be higher. This type of loan requires solid credit and could work for someone successful with investments.

Balloon mortgages have short terms, sometimes two to 10 years, with a lump-sum payment due at the end of the term. This balloon payment satisfies the loan, which has its monthly payments based on a standard 30-year amortization schedule. While balloon mortgages are more common for commercial real estate, they’re also options for home loans. Borrowers usually have lower payments that cover interest-only during the term, but they can include payments toward the principal. At the end of the balloon mortgage, homeowners have the option to refinance or sell the property to pay back the principal.

Are Fixed or Adjustable Rate Loans Preferable?

In addition to fixed rates, adjustable-rate mortgages are additional financing options. Both have advantages and disadvantages. An adjustable-rate mortgage can be a money-saving option if the interest rate cooperates. Fixed rates offer stability throughout the term of the loan. If rates fall, homeowners need to measure the cost savings against the cost of refinancing their loan. If rates rise, homeowners are shielded from any impact. Fixed interest rates are most attractive when rates are low or are beginning to increase.

Adjustable-rate mortgages have rates that float or adjust and might be preferable when interest rates are moving higher and aren’t predictable. Adjustable-rate mortgages typically have 30-year terms, with an introductory rate for a specified period of time, and annual rate adjustments every subsequent year; rates on adjustable-rate mortgages may be set for several years before annual resets begin. Since the rates fluctuate with the market, banks can offer lower interest rates on adjustable-rate mortgages knowing that rising rates will cause the mortgage’s interest rate to go up. Interest rates are determined by the index and the margin; the margin, or percentage above the index, remains the same throughout the loan.

Standard adjustable-rate mortgages have an interest rate that resets every year. Hybrid adjustable-rate mortgages have a longer grace period of three to 10 years with a fixed interest rate before annual interest rate adjustments begin. Balloon adjustable-rate mortgages have lower payments for a shorter term of about two to seven years, but the rest of the balance is payable in full at the end of the term. Refinancing or selling the home are the options at this point. Both options carry a risk, as interest rates and real estate values can fluctuate. Refinancing could be risky if rates go up or the borrower’s credit score goes down. Paying the balloon payment could also be difficult if real estate values decline.

What Are Other Considerations When Choosing a Mortgage?

Consider your options before choosing a mortgage. Think about how long you plan to stay in the home, monthly budgets, and other factors. Check if there are any prepayment fees; it may be easy to send in extra money to pay the loan down early depending on how your situation changes in the future.

Homebuyers seeking a larger home or those with limited budgets have more purchasing power with a 30-year mortgage. Other financial considerations like saving or paying for a child’s education, investing, or paying down debt could also make a 30-year term the most attractive option. The longer-term loan can save hundreds of dollars a month that can be used for other things. Those who seek to maximize their buying ability or free up cash for other things can elect mortgage terms of 40 to 50 years.

Shorter terms like 15 years or possibly 20 are more attractive to those who don’t want to carry long-term debt. In addition to paying less interest and paying off the loan faster, shorter-term loans help those who are approaching retirement. Income in retirement is often lower, so owning a home clear of any debt can help people retire comfortably. 

If you’re interested in learning more about real estate investing and available funding options, reach out to the knowledgeable team at Titan Funding.