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Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

What's the Right Mortgage Length for You?

You’ve found your dream home. But the monthly mortgage payment that comes with it is out of your budget. What do you do? Most home buyers debate whether they should take out 30-year or 15-year fixed-rate mortgage loans. For some, the answer is an even longer-term mortgage loan: the 40-year fixed-rate mortgage.

Like its name suggests, the payback period for a 40-year fixed-rate loan stretches over four decades. And because of this, the monthly payments that come with it are lower. These lower payments mean that some buyers might be able to buy a more expensive home. Borrowers who take out 40-year loans might face mortgage payments that are $100 or more less each month than they would if they had taken out a similar loan with a 30-year term.

This doesn’t mean, however, that a 40-year mortgage loan is the right choice. There is one definite negative to a 40-year loan: borrowers will pay more in interest–a lot more–during the life of such a loan.

Mortgage Interest

The interest rates attached to a 30-year fixed-rate loan are higher than those that come with the shorter-term 15-year fixed-rate loan. The reason? A shorter loan term means less risk for mortgage lenders. This is because homeowners are paying back more of the mortgage money they borrowed with each monthly payment than they would if they had taken out a 30-year fixed-rate mortgage loan.

It makes sense, then, that the interest rates attached to 40-year fixed-rate mortgage loans are even higher. Lenders are taking on more risk when they allow homeowners to stretch their mortgage payments out over such a long period. To protect themselves financially, lenders charge higher rates for these four-decade loans.

The Numbers

What's the Right Mortgage Length for You?

Consider this example: Borrowers who take out a 30-year fixed-rate loan of $180,000 with an interest rate of 4.25 percent will have a monthly payment–not including property taxes and insurance–of $885.49. If they take the full 30 years to pay off their mortgage loan, they’ll pay a total of about $137,777 in interest.

Borrowers who take out the same $180,000 at 4.25 percent interest but as a 40-year fixed-rate loan will have a monthly payment–not including insurance and taxes–of $780.52. But if they take the full 40 years to pay the loan they’ll pay about $194,657 in interest. Borrowers with the 40-year fixed-rate mortgage loan, then, could pay more than $55,000 in interest than those who chose the 30-year loan.

It’s true that the monthly payment with the 40-year loan is about $105 less than the one that comes with the 30-year loan. That comes to $1,260 less a year. But that extra interest is a steep price to pay for those savings.

The Takeaway

What's the Right Mortgage Length for You?

The mortgage length you end up choosing will ultimately be up to you and your finances. Some can handle the higher monthly payments of a 15-year loan, while others will need 30 years to pay it off. When deciding what mortgage length is right for you, be sure to take into account factors like monthly payments and interest rates.

Tips for Buying a Home

  • Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.
  • Talk to a financial advisor about how buying a home will factor into your larger financial plan. You want to ensure you can purchase a home without sacrificing your other financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/BrianAJackson, ©iStock.com/Weekend Images Inc., ©iStock.com/courtneyk

Dan Rafter Dan Rafter has been writing about personal finance for more than 15 years. He is an expert in mortgages, refinances and credit issues. Dan's written for the Washington Post, Chicago Tribune, Phoenix Magazine, Consumers Digest, Business 2.0 Magazine, BusinessWeek online and dozens of trade magazines.
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