Loan Experts Discuss 30-Year Mortgage vs. Shorter-Term Loans


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On November 15, Loan Officer Nicole Dennis worked at Arcadia Lending in Clawson. Mortgage creator David Graciak said a 30-year mortgage was “by far the most popular for anyone buying a home.”

METRO DETROIT – The process of preparing to buy a home is an exciting time in the lives of many people.

Whether someone is looking to buy a property for the first time or is looking to downsize or upgrade, buying a home is a big change in life.

For many, the first step in the process of this life-changing journey is speaking with a mortgage lender to get pre-approved for a loan.

In addition to inquiring about things such as desired price range and employment status, lenders are likely to ask people applying for a mortgage about their preference for the length of a loan.

There are a variety of options to choose from, with 15 and 30 year terms being two of them.

“Typically, when you buy a home, you’re not going to make a 15-year term, just because that payment is quite expensive, obviously,” said David Graciak, mortgage originator at Arcadia Lending in Clawson. “They’re offering the 30-year mortgage term for a reason. It is by far the most popular for anyone buying a home.

The reason for the popularity of a 30 year term is that it offers homeowners the lowest possible monthly payment.

Michael Halker is a mortgage originator at Reliance Financial Group in Troy, and he agrees that 30-year terms are the most popular.

“One of the main advantages of a 30-year loan is that it gives you the ability to have the lowest possible overall mortgage payment because it is spread over 30 years. Some people see this as an advantage, ”Halker said. “Some people can only afford the payment on 30-year amortization, but they wouldn’t qualify at, say, 20 or 15 years because the payment would be higher.”

Graciak said that after the 30-year option, the second most popular choice for homebuyers is somewhere between a loan term of 20 to 25 years.

Despite lower monthly payments on a 30-year mortgage, those who choose a shorter term rate can save on long-term interest.

For example, on a 30-year mortgage, if a homeowner financed $ 300,000 on a new loan, at an interest rate of 3% over 30 years, the loan repayment would be $ 1,265 per month, taxes and insurance. not included. During those 30 years, if each payment was made, $ 155,000 would be paid in interest to the lender.

On the other hand, if a homeowner financed $ 300,000 on a new 20-year loan, with an interest rate of about 2.75%, the monthly payment would be $ 1,626, or $ 361 more than the example over 30 years.

However, in this scenario, an owner would pay $ 90,000 in interest, which is $ 65,000 less than it would be for a 30-year term.

A homeowner’s financial situation can go a long way in determining whether it is better to save money on a monthly basis but pay significantly more interest over the life of the loan, or vice versa.

The good news for home buyers is that there is a scenario where they can have the best of both worlds.

What starts out as a 30-year term can be shortened.

“Everything is based on the amortization of the loan itself, so anything above the minimum payment goes towards the principal balance,” Graciak said. “There is no prepayment penalty on mortgages, so you can pay off your loans as quickly as you want. Just because you’re 30 years old doesn’t mean you have to take 30 years to pay it off.

Even those who aim to pay off a house in 15 years may choose to opt for a 30-year term because of the flexibility it offers.

“Some people can afford a 15-year fast-track plan, but they always go for a 30-year plan because they like the minimum required payment to be as low as possible,” Halker said. “But they can always choose to make an accelerated or 15-year payment on a 30-year mortgage and pay it off faster. But in the times when they want a little extra cash for the month, they may have the smallest minimum payment they need to make in the bank. So, different strategies dictate the type of loan term someone might want. “

Halker shared the example of a client who could afford a 15-year mortgage but decided to go for a 30-year term after weighing his options.

“When we looked at the rates between the 15 and 30 at the time, there was only 3/8 of a point difference between the 15 and 30,” he said. “He chose to go for the 30 year old because the interest wasn’t much (different) and he wanted to have some extra money while on vacation. So he said, “I can get the lowest payment I can, but after the vacation I’ll start paying 15 years again and I’m on track to pay those 30 years 15 years from now anyway.” But when I want to have extra cash, the 30-year-olds give me the smallest payout possible. ‘”

When it comes to prepaying a loan, homeowners have different options.

One would be to make an extra mortgage payment per year, which would mean making 13 instead of 12.

Another option is to pay extra on the mortgage payments each month.

Either option pays off the mortgage sooner.

“There is no right or wrong way to do it,” said Graciak. “Paying extra, whether it’s monthly or just once a year, has the same effect on the loan itself. “

According to Debt.org, making an additional payment per year on a $ 200,000 loan at an interest rate of 2.75% reduces the three-year mortgage and saves $ 12,000 in total interest.

A mortgage prepayment calculator can be found by visiting nerdwallet.com.

Regardless of the length of the loan, an applicant’s credit, income and assets play a role in whether or not an application is approved. However, the length of term for which a person is applying can make a big difference in the process.

“Your debt-to-debt ratio, so how much money you make, determines (the) mortgage payment you may be entitled to,” Graciak said. “It’s easier to qualify for a 30-year monthly mortgage payment because it’s the lowest possible payment, compared to a 15-year payment (which) can be almost double the payment. “

How long a person expects to stay in a house can be a determining factor in deciding what the best length option is for them.

“Long-term goals, I would say, take into account how much they put up front or the length of their mortgage,” Graciak said. “But I would say 90% of buyers typically go for the 30-year mortgage term, just because there’s not really a break in the interest rate between the 15-year term and the 30-year term,” so why handcuff yourself to a 15 year term when you can still make the 15 year monthly payment even if you have a 30 year term.

Although the 30-year terms are the most common, Halker said the eight, 10, 12 and 15-year terms are popular for people “a little older” because they don’t want to have mortgage payments after they have paid. are retired.

He also added that in doing so, “they have a free and clear house to pass on” to their children.

In all of these scenarios, credit scores play an important role in determining whether or not someone is approved for a mortgage, and Arcadia owner Mike Martin offered some advice.

“Make sure you shop with a few lenders,” Martin said. “Not all guidelines are the same for everyone. A lender may only give loans at (a) 625 (credit score) or better, while other lenders like us will help you with lower credit scores and you really don’t have to do anything to fix anything. that is. So that’s a huge factor.

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