Is a Short-Term Home Loan Better?

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We at Federal Home Loan Centers want to further remove stigma from the commitment of a mortgage.

When taking on any debt, we want to know many factors before agreeing to it. Aside from the primary concerns of the overall amount financed and the interest rate, there are two big things people worry about – the term of the loan (how long it takes to pay off) and monthly payments.

Let’s say, for example,  you want a home that is $200,000 with an FHA home loan. You will have to plunk down $7000 for a 3.5 percent down payment. Then, we will take the hypothetical $1000 property taxes, plus the $1200 annual homeowner’s insurance.

If you were set up with a 3.75 percent interest rate at a term of 30 years, your monthly payment would be around $1,077 per month when you include taxes and insurance. Let’s say that time commitment makes you nervous, and you want to pay this mortgage off faster than 30 years.

Since you would have to pay more of a principle amount to pay the loan off quicker, your monthly mortgage payment will go up. You will be paying around $1,586 per month now, for a shorter loan term. By paying off the loan at 30 years instead of 15, you would be saving over $500 per month. Yes, you will pay less interest if you span the loan less than 30 years, but when you think in the short term, you will have more spare money for the present to spend on an emergency, repairs, redecorating, or taking a vacation.

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Paying off a mortgage does not have to feel like this.

One of the biggest reasons you will want to stick to the longest term possible for a federal home loan is that there are no penalty fees for paying off your mortgage early. If you were in the position to pay off the remainder of your loan early, after you put aside a hefty amount of savings (we would say enough reserves to last you at a minimum of a year), you do not have to pay a retribution fee as punishment for the lender missing out on all that extra interest.

Remember, while a mortgage has potential to save you money and the money will be going towards your own property, a mortgage is still a financial undertaking. Putting undue pressure on yourself by shortening your loan term, or paying off your loan early if it means draining your assets, is not recommended.

A mortgage does not have to feel like a weight on your shoulders – it can be a liberating experience. If you have any doubts, ask your lender or seek out a friend, family member, or coworker who has gotten a mortgage. Asking others could provide you with some helpful advice.

If you are ready for a mortgage, give a call to Federal Home Loan Centers at 877-432-5626(LOAN). We would also love to tweet with you on Twitter at @fedhomeloan.

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