There are a lot of different options when it comes to selecting a mortgage for your home purchase. When most buyers are looking for a home, they typically don’t look much into their mortgage aside from what rate they are being charged. While the interest rate you are paying is the most important factor, it is not the only factor that you should be considering.
One of the things I like to stress most to my buyers is that they should never put themselves in a situation where they become “house poor”. This means that a large portion of your income is being used to facilitate paying for your mortgage and household expenses. This happens quite often because when banks approve you for a mortgage, they are not calculating what you are spending on consumer goods.
I believe buying a home should add to the life you already live and this is why I recommend to many of my clients that they consider getting a 30 year mortgage instead of the more common 25 year mortgage. In a sense, it is very good that most people think that having a shorter mortgage term means it will be paid off faster. So, why would I recommend a 30 year mortgage to clients?
Well, you have to consider that whether it is a 25 year mortgage or a 30 year mortgage you are signing, those years are simply used as the fixed amortization period. Meaning that if you pay your monthly mortgage payment every month, your mortgage balance will be 0 after the amortization period has passed. What it doesn’t take into account, is that most mortgages have many prepayment options that you can take advantage of which can greatly reduce the amount of time you are paying off your mortgage.
For instance, by doing a simple change like accelerated bi-weekly mortgage payments, you will shave over 3 years of a 25 year mortgage. Along with that bonus, some other options that most lenders allow are:
- Double up Payments: Every month you can double your monthly mortgage payment
- Anniversary Payment: Have the ability to pay anywhere from 5%-20% of your mortgage principal once every calendar year.
The most important thing to note is this; every dollar you put towards your mortgage that is ABOVE your fixed monthly payment goes directly toward the PRINCIPAL balance. Taking advantage of prepayment options can greatly reduce the length of time it takes for you to pay off your mortgage.
This is why a 30 year mortgage is a great option for many buyers. It provides you the flexibility of having a lower monthly payment, but with many options that can have you paying off your mortgage 5,10, even 15 years sooner. I’m not one that believes that debt is a good thing, but if it is managed properly, it can actually remove a lot of stress and allow you to continue enjoying a healthy and balanced lifestyle.
If you would like more information or have questions about what mortgage options make most sense for you, feel free to reach out anytime.