The 30-year mortgage has stood as the benchmark for American homeowners. In fact, according to Freddie Mac, a federally-backed mortgage guarantor, a staggering 90% of today’s homeowners opt for the 30-year mortgage to settle their home loans. However, the landscape of home buying is evolving, driven by a growing reluctance among Americans to accrue debt and a surge in remote work arrangements.
Given these shifting priorities and circumstances, is the time-honored “old reliable” 30-year approach still the optimal choice for today’s homeowners? Or, is the 20-year mortgage gaining preference? There are several factors that you should consider when determining the ideal mortgage repayment timeline. Read on!
20-Year Mortgage
Advantages:
-Accelerated loan payoff: Opting for a 20-year mortgage leads to larger payments over a shorter span. This results in loan settlement an entire decade earlier than a 30-year mortgage.
-Swifter equity accumulation: The 20-year timeframe facilitates quicker equity growth in your home each month compared to a 30-year term.
-Reduced total interest: Generally, 20-year mortgages offer lower interest rates than their 30-year counterparts. The shorter loan duration also translates to less cumulative interest over the long run.
Drawbacks:
-Higher monthly payments: The principal disadvantage of a 20-year mortgage is the higher monthly payment. While elevated monthly contributions facilitate substantial principal reduction and a shorter loan term, this can limit your monthly cash availability. This aspect may prove challenging if your income is lower or you have significant other financial commitments.
30-Year Mortgage
Advantages:
-Lower monthly payment: Opting for a 30-year mortgage yields a lower monthly payment than a 20-year mortgage. The extended repayment period mitigates monthly financial strain, which is particularly beneficial for those still progressing toward earning potential or managing substantial expenses.
Flexibility in early repayment: The extended mortgage period allows for more manageable advance payments. This cushion can result in a quicker loan payoff, possibly well before the anticipated duration.
Drawbacks:
-Increased total interest: A 30-year mortgage typically carries a higher interest rate than a 20-year counterpart. Furthermore, the extended repayment period entails making monthly payments for an additional decade, resulting in significantly higher cumulative interest payments.
-Gradual home loan payoff: Opting for the minimum monthly payment throughout the mortgage term extends the loan payoff period by ten years compared to a 20-year mortgage. Consequently, equity accumulation occurs at a slower pace.
Guidelines for First-Time Home Buyers
-Approach budgeting with realism.
-Take measures to preserve and enhance your credit profile.
-Secure pre-approval before submitting an offer.
-Establish an emergency fund equivalent to at least three months’ expenses.
-Evaluate your readiness to commit to your future home for at least five years before contemplating a sale. Failure to meet this criterion might indicate that it’s not the optimal time to venture into homeownership.
