When you are buying a house, an important yet often overlooked question to ask yourself is: How long do I plan to stay in this house? It is important to plan how long you will live in the home so that you know what type of loan repayment terms will be best for you. Mortgages are available in many repayment terms, such as a 20-year or a 30-year mortgage.
30-Year Mortgage
A 30-year mortgage is the traditional and most popular type of conventional, fixed-interest rate mortgage. If you get a 30-year mortgage, it does not mean that you must stay in the house for 30 years. A 30-year mortgage simply spreads your monthly payments over 30 years, and if you choose to sell the home before then, you can make different arrangements at the time of sale.
20-Year Mortgage
A 20-year mortgage is a nontraditional mortgage, which is less preferred by lenders. BankRate.com says that when lenders make a loan, they resell the loans in the secondary market. The market takes 15-year and 30-year mortgages, but there is not a high demand for 20-year mortgages on the secondary market, so lenders may not offer good terms for a 20-year mortgage because they want to discourage it.
Interest
According to the financial website BankRate.com, the amount of interest paid over the life of the loan is higher with a 30-year mortgage than it is with a 20-year mortgage. This is because interest is calculated based on 10 more years with a 30-year mortgage. Theoretically, the borrower would stay in the home for the full 30 years and repay the loan over a longer period of time than the 20-year mortgage, meaning he would pay more interest over time.
Monthly Payment
Even though a 30-year mortgage has a higher interest rate than a 20-year mortgage, BankRate.com explains that a 30-year mortgage comes with a lower monthly payment. The benefit with a 20-year mortgage is that the loan is paid off faster, but the benefit with the 30-year mortgage is that the homeowner does not have to pay as much each month towards her mortgage payment.
Fixed or Adjustable Interest Rate
When you are deciding between a 20-year mortgage and a 30-year mortgage, CNN Money recommends considering all of the factors in the loan's terms, not just the repayment period. For instance, if a 20-year mortgage has a variable interest rate and a 30-year mortgage has a fixed interest rate, the 30-year mortgage would be a safer bet, because you can budget for the same amount of mortgage payment each month. Variable interest rate mortgages often are adjusted at six-month or one-year time periods, so the interest rate may increase.
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