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When choosing a loan term for your home mortgage, you should account for financial goals and realities. What is affordable, cost-efficient, and accommodating to your financial goals is the term that is optimal.
Residents of the Evergreen State are now at an advantageous nexus where low interest rates are conjoined with rising property values. The time for buying or refinancing is ripe. Still, mortgage applicants are left with a number of questions to answer: What loan product works best? Am I creditworthy? What sort of equity can I bring to, or do I have in the property? Another major decision regards what length of loan term works best. Whether 15 or 30 years, for example, this choice determines the size of monthly payments and the risk it poses to the lender.
The duration of loan terms depends on the lender. Many emphasize 30 and 15-year products, while others are equally comfortable marketing their 25 or even 20-year loan programs. A loan officer can walk customers through the advantages and disadvantages of each. Longer terms, of course, mean lower remittances each month, for the most part. The converse is that shorter terms eliminate the debt and build equity faster. It boils down to a few variables, the primary purpose of the property, how long an owner plans to keep it, and basic affordability.
The length of mortgages depends in large part on their structure. A fixed-rate mortgage amortizes in a consistent manner regardless of term. Accordingly, this type of loan may offer a wider range of terms. Meanwhile, loans with a variable rate feature, also known as adjustable-rate mortgages (ARMs), are underwritten according to the cap or maximum rate allowed. While these products may have a period of five to 10 years of fixed payments, the fluctuating rates kick in for the remaining years. Because of this, ARMs are most frequently offered as 30-year loans. Those who search lenders from Bellingham to Walla Walla may find exceptions, but not too often.
When considering a loan term for your home mortgage, certain realities must be accounted for. This not only affects loan approval, but it also determines the quality of life while the loan is in progress.
A $300,000 mortgage loan borrowed at an interest rate of 3.5 percent will cost a borrower $1,347 in principal and interest per month over 30 years. Reducing the term to 15 years under the same parameters will yield a monthly remittance of $2,145. An applicant may get approved for either term, but the delta between these two outlay figures is where people buy their groceries, pay medical bills, and save for college.
Remember, underwriters do not count dependent children, nor do they consider the cost of health care, or do they care how much is spent on schooling or aging parents. Nearly $800 is saved by going with the 30-year term, $800 that can be put to myriad uses for growing families. If expenses are high and oppressive, keeping the monthly outlay low is a tempting option.
The example referenced above demonstrates one reason to opt for a long-term mortgage, but it is not quite accurate because it does not tell the whole story. The flaw in this example is the interest rate. It is actually more attractive with loan products of shorter duration. Tweaking the rate in the 15-year example from 3.5 percent to 3.125 makes a monthly principal and interest payment of $2,090, $55 less than in the original illustration but still well above the long-term payment.
Still, a borrower pays less interest for a short-term mortgage because 1) the rate is lower and 2) the number of payments is reduced from 360 to 180. In total, less interest is paid in absolute dollars for the shorter term even though the payments are higher. In other words, the annual percentage yield (APR) is lower. Taking a holistic view, then, the shorter-term product is, the cheaper one.
How long does a homeowner expect to stay put? If the decades are stretching out ahead with no plans for change, why not take a longer-term? Well, for one thing, it is more expensive over the life of the loan, as just noted. However, a long-termer can bide his or her time, waiting for lower interest rates and refinance later. Yet not everyone builds a record of longevity in a home. Some careers are more conducive to frequent moves than others. Others, though still working, see retirement approaching and are planning to downsize. What should such transient types do relative to mortgage terms?
It is a good question for a seasoned loan officer. Other variables like income, assets in the bank, and current debt carriage can help one to decide as well. One avenue to pursue in preliminary discussion is the ARM that offers a fixed period of five to 10 years. This initial rate is often lower than those of its fixed-rate mortgage counterparts. If the expectation is to buy and sell within a decade, this type of credit holds definite promise. Again, laying the entire financial picture before an experienced professional is the best way to make an informed decision.
Often, homebuyers, first-time homebuyers, in particular, are on the cusp of starting a family, or not. A couple without children, and content to be so, might prefer a smaller dwelling that suits their purposes and promises to appreciate as an asset in the future. They do not expect to downsize later on and enjoy the quality of life that extra disposable income offers. On the one hand, a 30-year fixed loan looks good in terms of its more modest monthly demands. However, viewing the asset potential of the little domicile as they do, building equity faster, and eliminating debt expeditiously has its benefits when looking through the lens of financial security.
Another couple has two kids, with another on the way. They may still want one or two more. Both have good incomes and want a big house with ample property. While they can swing a 15-year given their revenue and assets, there are several question marks in their tomorrows, and they may want to sock away as much as they can. Still, acquiring the house free and clear more rapidly allows them to leverage the property in years to come for helping their children with college or getting started in their own homes. All told, there are any number of scenarios that are served by either longer- or shorter-term mortgages.
As is evident, all the factors that go into deciding on a loan term for your home mortgage can work both ways. Each borrowing household is unique, and there are no formulas to make this decision easy. The good news is that there are professionals who have worked with hundreds of individuals, families, and subject properties and learned a thing or two in the process. They understand expenses beyond what is found on credit reports. They also appreciate financial aspirations and financial limitations. They can study your particular situation and present the best course of action. Make an appointment with a loan officer today.
Since 1992, Sammamish Mortgage has been in business and has helped plenty of home buyers in the Pacific Northwest. If you want mortgage financing in Washington, Sammamish Mortgage can help. We offer mortgage programs throughout the entire state of Washington. If you have mortgage-related concerns, feel free to contact us. It’s also possible to View Rates directly on our website or Apply Instantly or get an Instant Rate Quote.
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