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Choosing a mortgage term

Choosing the right mortgage length may seem difficult, but this decision will influence your long-term financial health. The options can seem overwhelming, especially if you’re a first-time home buyer. It’s important to pick one that meets your financial needs since you’ll likely have your mortgage for a significant period of time. Find out which mortgage term best fits your lifestyle and puts you on the right track towards homeownership.

What is a mortgage term?

A mortgage term is the number of years you have to pay off your mortgage. A 15-year term means you have 15 years to pay off your mortgage, and a 30-year term means you have 30 years. You have a payment due each month. A 30-year term normally has lower monthly payments than 15-year mortgages since your total mortgage balance is spread out over a longer period of time, resulting in smaller monthly payments. A shorter term means your balance is spread over a shorter period of time, making your monthly payments higher.

The interest rates and payments can differ dramatically depending on your mortgage term length. When you get a mortgage, your lender is loaning you a large amount of money, known as mortgage principal, to buy a home. The lender also charges interest on the principal and your interest payments are in addition to your mortgage principal.

Longer term mortgages, such as a 30-year mortgage, usually result in higher total interest paid over the life of the loan as interest is calculated based on the loan balance each month. The longer you take to pay down the balance, the more interest you’ll pay. Shorter term mortgages often have higher monthly payments but, because you pay the loan off sooner, your total interest paid can be substantially lower.

How long can a mortgage term be?

A mortgage can typically be as long as 30 years and as short as 10 years. Short-term mortgages are considered mortgages with terms of ten or fifteen years. Long-term mortgages usually last 30 years.

Short-term mortgages are best for:

  • Fewer total payments
  • Paying off your mortgage faster
  • Lower total cost

Long-term mortgages are best for:

  • Lower monthly payments
  • More time to pay off your mortgage
  • Opportunity to benefit from lower rates in the future if you have an adjustable-rate mortgage

Fixed-rate mortgage vs adjustable-rate mortgages

In addition to the length of your mortgage, you also need to consider whether to choose a fixed-rate or adjustable-rate mortgage. Many homebuyers choose a fixed-rate mortgage without considering the adjustable-rate option. There are situations, however, where an adjustable-rate mortgage may better fit your needs.

A fixed-rate mortgage has an interest rate that's permanent for the life of the loan. With a fixed–rate mortgage, you'll always know what your monthly principal and interest payments will be. You can choose a 10–, 15–, 20–, 25– or 30–year term for fixed-rate mortgages.

An adjustable-rate mortgage (ARM) offers a lower rate for a set number of years at the start of the loan. The introductory rate is fixed and often lower than competing fixed-rate mortgages. The introductory period can last up to 10 years and, once it’s over, your rate becomes variable for the remaining loan term. This means that the interest rate will adjust every year after the introductory period ends. For example, a 5/1 ARM would have a fixed interest rate for the first five years, then convert to an adjustable rate. You can choose a 5/1, 7/1 or 10/1 ARMs with a 30–year term.

There are advantages and disadvantages to both adjustable- and fixed-rate mortgages. The type of loan you choose depends on your financial goals and housing needs.

Pros of a fixed-rate mortgage:

Predetermined and unchanging interest rate. Fixed-rate mortgage principal and interest payments don’t change. This provides some security knowing your rate won’t increase.

Cons of a fixed-rate mortgage:

You may get locked into a high interest rate. Mortgage rates are dependent on the housing market. If mortgage rates are high when you buy your home, you may be stuck with a high rate for a long term.

Pros of an adjustable-rate mortgage (ARM):

  • Introductory period. This low interest rate can be a money saver for first-time home buyers or people who plan to stay in the home for only a few years.
  • Variable rate. The adjustable interest rate is beneficial for when mortgage rates drop and result in lower monthly payments.

Cons of an adjustable-rate mortgage (ARM):

  • Variable rates can be risky. Since mortgage rates fluctuate depending on the housing market, you could pay higher interest rates than fixed terms. A rise in interest rates will result in higher monthly payments.

Finding the best mortgage term for you isn’t as stressful as it may seem. Doing your research and understanding your options can make the process easier and give you confidence when choosing a mortgage term. Speak to a Home Lending Advisor for more help understanding which mortgage term is right for you.