Long or Short Term Mortgage?

Some people who feel financially secure are considering a mortgage for a shorter duration than the traditional 25-30 years. This can drastically reduce your overall payments, but can also mean that if your situation changes, you will be locked in at a high mortgage payment. Is it worth it to take out a longer mortgage and make extra payments?

One definite advantage of short term mortgages is the interest rates, which can be several points below that of a 25-40 year mortgage. If you are confident that the rates are going down or will stay level, a short term mortgage that repeats may be a smart choice. However, it is difficult for even the most knowledgeable financial analysts to completely predict interest rates, so you should be prepared in case rates take a jump.

If you know you will be moving in the next few years or think you may, a shorter mortgage is going to cost you less in the long run. The disadvantage to this is if you decide to stay in your home for longer than you expected or can’t sell by the time the short-term period runs out. For people in a hot home market who are looking at “flipping” a home – selling it relatively quickly after renovation, a shorter mortgage makes sense, as you know you won’t be keeping the house around for long.

Life changes affect everybody and it makes sense to be prepared. A death or birth in the family, relatives or friends in need and personal life events can make previous plans for a home suddenly less feasible. While no one wants to dwell on the loss or worsening condition of a loved one, it behooves you to consider how this will affect your home mortgage plans. The loss of your job; how do you plan to pay for the mortgage if you have a drastic reduction in income for several weeks or months? A birth may be a joyful occasion, but it is also an expensive one and one that may make you rethink moving. These things need to be taken into consideration

It seems obvious that shorter-term mortgages are best for people who keep track of interest rates and current events and know what they plan to do with their home. It is also wise to have liquid assets that can be used to cover your living expenses in case of loss of income, unexpected events and the possibility that interest rates will go up when you need to refinance.