30 Year Mortgages?
We had a question from a reader about whether they should opt for 30 year mortgages or take something shorter such as a 15 year or 20-year mortgage. He stated that he could afford the monthly payments of all of the mortgage terms so that this would not be an issue for them. Their credit rating is good and they are looking for a relatively small mortgage by today’s standards. It really boils down to whether a 30-year mortgage is the right vehicle for them when it comes to finding a mortgage for the home they want to buy.
There are many issues to take into account when you decide on the term of the mortgage that you will agree to. While you do not want to be housebound by large mortgage payments, the general rule would be to take the shortest term you can afford and repay the mortgage as quickly as you can. This minimizes the total interest you pay and the overall cost of the mortgage. There are other factors as well to take into account, so we will discuss a few of them in the following paragraphs.
No 30 Year Mortgages in Canada
In Canada, the maximum mortgage that can be negotiated in terms of length is now 25 years. gone are the long mortgages that minimized monthly payments. In the US as far as we know, long term mortgages of 30 and 35 years are still available. Clients should recognize that they will pay much more in interest with these really long mortgages.
Interest Rate – The interest rate will vary for the different types of mortgages and you will renew your interest rate every 5 years. With a long term mortgage, consumers pay very little of the principal in the first 10 years so you really do not build up equity. Equity increases come from the home as it appreciates if it does over the time you have the home. In some cases, such as in the past few years the value of homes has declined. Something to think about.
Prepayment Options – Although you do not repay much of the mortgage in the first 10 years with a 30 year mortgage, there is one way around this that will decrease the amount of interest you pay in total and build up equity more quickly. Make sure you have the option to repay a portion of the mortgage every year, usually 10%. This is a great way to increase your equity and decrease your interest cost as well.
Mortgage Insurance
Insurance Costs if any – Some companies want special insurance costs added. Check this out to make sure that this cost is well understood.
Ability to Pay – Shorter-term mortgages mean larger payments since you are paying the mortgage off more quickly. Ask your bank to give you a quote for the various terms including the 30-year term mortgage so that you can assess your ability to meet the monthly payments without placing undue stress on your budget and quality of life.
Retirement Concerns
Years to retirement – The reader who posed the original question has just graduated. He has many years to go before they will be retiring, so this is not an issue for them. However if you are 50 and you’re applying for a 30-year mortgage, some banks may not be willing to provide you with approval of a 30-year mortgage.
As you can see there are lots of factors to consider in deciding how long a mortgage you are going to apply for. It is an individual decision based on your situation. Hopefully, this information helps our readers. If you have questions, please feel free to leave us comments with your questions. For more information about mortgages, click here.
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