Helping clients decide what mortgage options to go with is a big decision. The duration of which your clients will pay off their mortgage should be their first factor to consider. The loan period impacts the total amount of the loan and the size of their monthly payments. Throughout the loan, interest accrues, increasing the total amount they owe. Shorter or longer mortgages have many advantages and disadvantages for homeowners. Here are what your clients need to know about the types of mortgages.
10-year Mortgage
A 10-year fixed-rate mortgage has the same interest rate and payments. Also, this type of loan is available with lower lifetime interest rates. But, homebuyers who choose this option should expect to make larger monthly payments. The reason behind this is that the loan duration is shorter. A 10-year mortgage is an option offered by some lenders during the home-buying process. These are usually the shortest home loan terms available.
15-Year Mortgage
A 15-year mortgage is a loan with a fixed interest rate and monthly payment for the loan duration. Some borrowers choose the 15-year mortgage over the more traditional 30-year mortgage. Homebuyers will choose this option since it can save them money in the long run.
30-year Mortgage
A 30-year fixed-rate mortgage takes 360 months of payment, assuming all payments are on time. The interest rate on a fixed-rate loan remains constant during the life of the loan.
Why a short-term loan is less expensive in the long run
In the long run, a 10-year or 15-year mortgage is less expensive. Compared to a 30-year loan, the total interest payments would be lower. An annual interest rate also determines the cost of a mortgage. Thus, shorter loans compared to longer ones are desirable. And the total interest to pay will almost be less than payments with loans over 30 years. A mortgage calculator can show how different interest rates affect monthly payments. It can also show the difference between 10, 15, and 30-year mortgage payments. A 10 or 15-year mortgage often has a lower interest rate. The reason is that short-term loans are less riskier for banks to fund than long-term loans. Thus, 10 or 15-year mortgages might be anything from a quarter to a whole point lower than a 30-year loan.
Financial advisors view a 10 or 15-year mortgage as savings because the payment is higher. In other words, the house becomes a form of investment rather than putting it in the stock market. Instead, you would be putting it in your home, which is likely to rise in value over time. Equity can develop faster with a 10 or 15-year mortgage than a longer loan by paying it down quicker. The difference between the worth of the property and the amount of debt a homeowner owes defines home equity. The faster mortgages get paid off, the quicker equity accumulates.
If your client can afford the higher monthly payment, it can help them pay off their house faster. Also, shorter loans may help them save money for retirement. Your client will also pay less in interest throughout the life of the loan with shorter loans. A 15-year fixed mortgage also has a lower interest rate. Additionally, shorter-term loans have a higher monthly payment. Thus, the 10 or 15-year note appears to be less affordable. But, the loan is less expensive in other ways because of the shorter period. In reality, a 30-year loan will cost double than a 10- or 15-year loan throughout the life of the loan.
Final Thoughts
Higher monthly payments may limit the type of property that your client can buy. Thus, it is crucial to think about their current monthly budget. Additionally, any future changes in income that may occur over the loan's term can also be risky.
There are many sorts of home loans to choose from, depending on your client’s situation. First, consider the options and how stable their income is. Next, considering whether they can afford a hefty mortgage payment is also important. Finally, consider their financial goals, whether it is to create equity or to pay off other debts.
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