You probably think you don’t have choice between a long or a short repayment term with your mortgage because you want to afford your monthly payments and you must you choose to spread your loan payments over a longer term of time, say 20, 30 years or more.
Of course, a mortgage with a short repayment term will need you to pay higher monthly payments because you pay your home faster, give less interest fee to the lender (during the repayment term and with an interest rate generally up to 1/2 percent lower than with longer terms) and… pay off a more each month. If you want to figure, a mortgage with a fixed-rate of 6% on a 15-year term may need you pay 30 to 40 percent more than if you repay your home in 30 years.
If you can afford pay up to 40 percent more with a shorter term, is it really a better option? Not necessarily, because you will not have any more money to make extra payment on the equity of your home. With a longer term, you will maintain the possibility to pay your mortgage faster (in changing the term), but you also have the opportunity to pay your home in another way.
If you have to pay high amount every months, you also have more financial risks if you have unexpected problems, as a car accident, health problems or if you lose your job. And if those bad events make you can fall behind in your mortgage payments, you may have difficulty to go out of this disastrous financial system! As a lot of people experience it during an economic crisis, if your personal finance gets worse and your house declines in value, you may have trouble refinance and risk to lose your house.
If you have enough time and motivation, you can figure how much interest you can save through a faster mortgage payback. First of all, think about the way you will use the extra money you will get with a lower monthly payment on a longer term. Will you use it to pay the equity of your home or spend it in all and everything (that can lose value)? If you think you can have the discipline to intelligently use your money to pay down your mortgage, maybe you don’t have to ask you more question: go for a longer term and an intelligent repayment method!
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