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How Long Should Your Mortgage Term Be? Understanding Your Options

When purchasing a home, one of the most crucial financial decisions you will make is choosing the length of your mortgage term. Most commonly, buyers select either a 15-year or 30-year term, but other intermediate options are also available. 

What Are the Main Mortgage Term Length Options?

The three primary mortgage term lengths available in the United States are:

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15-Year Term

  • Length: As the name implies, a 15-year mortgage has a term of 180 months (15 years).
  • Interest Rate: 15-year terms typically have lower interest rates than 30-year terms, often between 0.25-1.00% lower.
  • Monthly Payment: Payments on a 15-year mortgage will be higher than a 30-year due to paying off principal more quickly. Your monthly payment will be roughly 33-40% higher than the equivalent 30-year loan.
  • Total Interest Paid: Opting for a 15-year term means you will pay significantly less interest over the life of the loan compared to a 30-year. Interest savings can amount to tens of thousands of dollars.

30-Year Term

  • Length: The standard 30-year fixed-rate mortgage has a term of 360 months (30 years).
  • Interest Rate: Rates on 30-year loans tend to be slightly higher than 15-year terms.
  • Monthly Payment: Due to the extended term, monthly payments on a 30-year loan are lower than a 15-year. Payments are roughly one-third of the 15-year amount.
  • Total Interest Paid: Given the longer term, total interest costs on a 30-year loan will be materially higher than choosing a 15-year term.

20- and 25-Year Terms

  • Length: As the names imply, these intermediate options have terms of 20 and 25 years.
  • Interest Rate: Falls between 15- and 30-year rates, usually closer to the 15-year side.
  • Monthly Payment: Falls between 15- and 30-year payments but closer to the higher 15-year amount.
  • Interest Cost: Falls between 15- and 30-year totals, providing a compromise between payment and interest expense.

When deciding between these options, it’s important to thoroughly evaluate both short- and long-term impacts on your specific financial situation and goals. Let’s explore some key factors in more detail.

Factors to Consider When Choosing a Term Length

Payments and Interest Costs

As mentioned above, the longer the term, the smaller the monthly payment, but the bigger the total interest cost over the life of the loan. Going with a shorter term saves thousands in interest but increases monthly payments.

For example, on a $300,000 loan:

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  • 15-year at 3.5% interest: Payment = $2,086/month, Total Interest = $108,000
  • 30-year at 4% interest: Payment = $1,361/month, Total Interest = $196,000

Carefully modeling costs can help determine what tradeoff makes the most sense for your budget. A shorter term may allow paying off the home sooner for greater long-run savings.

Income Growth Potential

Opting for a shorter term leaves open the potential for earning higher incomes later in your career that could more easily support larger monthly payments. Starting with a 30-year and refinancing to a shorter term later is also an option. However, considering uncertain future incomes requires careful risk assessment.

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Retirement Timeline

For buyers planning retirement within 15-20 years, a shorter mortgage term allows being debt-free sooner. But a lower payment may be preferable for those with longer careers ahead needing current cash flow flexibility. Either way, you don’t want a mortgage hanging over your head in retirement.

Tax Benefits

When able to itemize, mortgage interest is tax-deductible for the first $750,000 borrowed (or $375,000 if married filing separately). However, tax reform has reduced the number of filers who itemize, so this benefit may not apply to your situation. Even when deductible though, interest paid is still a real cost against your home investment.

Inflation Risks

Inflation erodes the future purchasing power of a fixed monthly payment. A 15-year term insulates against this risk better by getting non-adjustable principal and interest paid off sooner before dollar erosion sets in sharply. Inflation protection is another advantage of shorter mortgage terms.

Liquidity and Flexibility

Having no mortgage gives ultimate flexibility to move, take a lower-paying job, start a business, travel, etc. However, the very low rates on 30-year loans allow for maintaining strong cash flow and reserves that provide liquidity advantages of their own in the short run. This flexibility must be weighed against long-run interest costs.

Overall, these factors should all weigh into your personalized assessment based on financial goals, risk tolerance, career/income trajectory, and retirement objectives. 

Thinking Long-Term: How Faster Payoff Can Boost Your Wealth

One advantage often underappreciated in choosing a shorter mortgage term is the profound long-term impact on wealth accumulation from paying off your home loan faster. Getting debt-free sooner allows redirect your increased housing costs (former mortgage payments) into investments earning returns instead of just paying interest to the bank.

Consider two buyers with the same $300,000 loan taking out:

  • A 30-year loan at 4%
  • A 15-year loan at 3.5%

Both invest their additional cash flow – the difference in their monthly payments – into a diversified portfolio, earning an average 7% annual return. After 30 years:

  • 30-year buyer still owes $104,000 on mortgage with $631,000 in investments
  • 15-year buyer is debt-free with $1,111,000 in investments

The 15-year buyer ends up nearly doubling their net worth simply by accelerating home payoff and reinvesting those dollars working for them over decades in the market. Many fail to appreciate how interest costs work against wealth building and how the “wealth multiplication effect” benefits those who invest extra cash flow and minimize interest charges.

While reaping these maximum rewards requires discipline, focus, and forbearance of current extra spending, it provides immense long-term payoff both financially and psychologically to be debt-free in fewer years. Most who commit to the 15-year path are glad they made the extra initial effort. Interest costs often dwarf investment returns on borrowings that persist for 30 years.

Carefully weighing your capacity and desire for short-term vs. long-term financial priorities is key to optimizing your personal choice of term length. Taking the long view almost always tilts the scale toward the 15-year option to maximize wealth over the lifespan.

Targeting Early Retirement: Why a 15-Year May Be Best

If your goal is to retire earlier than conventional retirement ages, a shorter mortgage term offers significant strategic advantages supporting that objective. Being able to direct all housing costs toward living expenses and investments once paid off allows pulling forward your retirement timeline markedly.

For example, retiring at 55 instead of 65 saves you a full ten years of working. For those desiring a 20+ year retirement, retiring just 5-10 years earlier has an immense impact in giving your savings more opportunity to grow and fund your non-working years. It also maximizes prime retirement years, being free of debt obligations.

Faster home payoff synergizes extremely well with retirement savings catch-up strategies to make earlier retirement financially viable. Getting your house paid off by 50 allows investing the $2,000+ you were paying toward your 15-year mortgage every month into retirement accounts instead. Over 10-15 years, that compounds to well over $500,000 of extra nest egg at retirement—enough to potentially pull off retiring a decade sooner.

While sticking it out to 65 with a 30-year loan delays true financial freedom until even later. As career responsibilities diminish nearer traditional retirement ages, the burden of debt can lose its hold over you much more quickly and positively impact your enjoyment of those years with a 15-year mortgage stint. Meeting early retirement goals makes the case for accelerated debt elimination, and thus the 15-year term, very compelling for many.

Caring About Legacy: The Case for Heirloom Homeownership

Most purchasers will reside in their first home for 5-10 years, or perhaps just until starting a family. But others prefer establishing roots and having the option to pass a fully paid ancestral home down to heirs, keeping it in the family for generations.

Opting for the shortest term and minimal interest obligation supports maximizing that legacy potential financially. Carrying a 30-year mortgage into old age or into retirement leaves open risks that adult children may face burdensome responsibility for a remaining balance if they pass away or need long-term care. It also consumes capital that could otherwise contribute to an intergenerational transfer of family wealth.

Those desiring an heirloom home invested for the long run that could evolve with descendants appreciate the empowerment of being debt-free sooner. It allows for potential gifts of housing, care in old age security through housing equity, and passing a fully unencumbered ancestral asset between generations.

Assessing Your Risk Tolerance

Another important factor is your individual tolerance for financial risk. Longer terms provide more flexibility and cash flow “cushion” against potential job loss, health issues, or economic downturns when monthly payments are lower. However, persisting debt amplifies risks of foreclosure or short sale if difficulties arise before paying off the loan.

Those seeking maximum protection from risks that could throw finances off-course over decades tend to favor faster debt elimination through shorter terms. Alternatively, extremely risk-averse buyers may choose adjustable-rate loans instead of long fixed rates due to uncertainty over interest rates so far in the future. But for most, a sufficiently long fixed rate on a 15- or 20-year term balances these concerns well.

In general, higher risk tolerance tends to tilt one toward extended terms and lower payments versus concentrating on accelerated debt elimination. Balancing financial security, savings capacity, and debt aversion levels drives an individually tailored assessment.

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