Mortgage Corner: How to determine the best mortgage term

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Choosing the mortgage term that is right for you can be a challenging proposition for even the savviest of homebuyers. By understanding mortgage terms and what they mean in dollars and cents, you can save the most money and choose the term that is right for you.

The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate, and a shorter term generally means a lower corresponding interest rate. While this generalization might lead you to believe that a shorter term is always the preferred option, this is not necessarily the case. While you may be paying a slightly higher interest rate for the 10-year term versus a three-year term, you have the security of knowing that your interest rate and payment is going to be the same for 10 years instead of three.

The best approach is to tailor your mortgage term to your risk tolerance. For those who need stability in their payments, a longer term is generally the best option. This means that you know exactly what interest rate you will be paying for a longer period. If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer-term mortgage, perhaps 10 years, so that you can ensure that you will be able to afford your mortgage payments should the interest rates increase. By the end of a 10-year mortgage term, most buyers are in a better financial situation, have a lower principle balance due and, should interest rates have risen, will be able to afford higher mortgage payments. If you are shopping for a mortgage for an investment property, you will likely want to consider choosing a longer mortgage term. This will allow you to know that the mortgage payments on the property will be steady for a long time and allow you to more accurately project your future income from the property. If, on the other hand, you don’t mind taking a bit more of a risk by having a shorter term, you may reap the reward of paying less in interest.

Another factor to take into account is the possibility of payout penalties if the term has to be broken. This could happen if you had to sell the home midway through the term. While this can be quite a complicated topic; generally speaking, the longer the term you have, the more the payout penalty is going to be. If you know you are going to be moving in two years, it may be best to have a two-year term. Again, though, this depends on whether you plan on buying another home once you sell because many lenders offer mortgage “porting” options, which effectively allow you to bring your mortgage with you to the next home you buy. It also depends on whether you have a fixed or floating interest rate, and whether rates have gone up or down.

Choosing the right mortgage term is a unique decision for each individual. By understanding your personal financial situation and your tolerance for risk, a mortgage professional can assist you in choosing the mortgage term that will work the best.

Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250-402-3903 or dean_bala@yahoo.com.