Nothing will affect the total mortgage payment that you have to make each month more than the duration of time that the home loan is taken out for. Both 20 year and 30 year mortgages have their potential benefits and drawbacks .The decision to take out a 20 year or a 30 year mortgage will depend on a variety of factors and should be weighed carefully. Here are just some of the things to keep in mind when you decide to take out or refinance to a 20 year or 30 year mortgage.
1. Twenty-year mortgages help you build equity more quickly. Taking out a 20 year mortgage can mean building equity more quickly and receiving a better rate. But it also means that monthly mortgage will be marginally higher. A 20 year mortgage valued at 300,000 with a fixed interest rate at 3% will come with a total mortgage cost of $1,663.79. If this were a 30 year mortgage with a 3.5 interest rate the mortgage payment will be $1,347.13. Moreover, because equity is being built up more quickly, it may become easier for you to take out a second mortgage down the road.
2. Take into consideration the stability of your income. While it’s generally good to build up equity more quickly, there are still other factors to keep in mind. If you’re income fluctuates every month, then you may wish to think twice about taking out a 20 year loan. The lower payments of a 30 year mortgage can help you build up a cushion in the event that you lose your job or become under-employed.
Getting into debt is inevitable for most people. And debt is ok as long as it can be managed. Nonetheless, there is still wisdom in trying to become debt free as early as possible. Choosing between a 20 year and a 30 year mortgage requires choosing between having more money and flexibility in the present and having more money and flexibility in the future. Our consumer driven economy tends the value the former, but the later approach should not be overlooked for its merits.
3. Interest rates do not constitute the entire cost of the principal paid on the mortgage. Points make up part of the principal that you will have to pay for your mortgage. Points are fees that banks attach to the cost of the mortgage. They cover expenses such as inspection costs and preparation fees, and typically vary depending on the terms expressed in the mortgage. One of the benefits of 20 year mortgages is that they vary often come with lower points. The mortgage rates for Bank of America’s 30 year fixed home loan came with 1.125% in fees for points. By contrast, that rate was only 0.75% for mortgages that were shorter in duration.
Of course, the main difference between 30 year and 20 year mortgages is the amount of principal that ends up being paid for the loan. The longer the duration of any loan the more you will end up paying in interest. If you want to retire someday with a lot more money, then I would strongly suggest considering paying off your mortgage more quickly with a shorter loan.
