Finding the perfect home is not easy, and going house hunting is only one part of the entire home buying process. After weeks of searching, negotiating, debating, and deciding, the light is at the end of the tunnel! There is one giant piece of the puzzle that is left to figure out, though: the mortgage. Taking out a mortgage is not a very simple process, and there are so many places where things can go awry. While you will almost certainly be approved for a mortgage by somebody, you want to do all that you can to make sure that you find the best mortgage offer for your own financial situation.
There is not really a correct answer to the question about whether short mortgages or long mortgage are better, as each kind can be the right solution for someone depending on their financial situation. When we say “long” mortgage we are referring to 25 or more years of loan length while when se say “short” mortgage we are referring to 10 or fewer years of loan length. This post will take a look at the reasons why each type of mortgage could be the right choice for you.
Advantages of Long-Term Mortgages
Long mortgages, which we consider to be ones with a loan life of over 25 years, sound intimidating to a lot of people. After all, contractually agreeing to pay a fixed amount for the next three decades is quite the task. However, there are definitely reasons why they exist! While a three decade loan is scary, it does allow the homebuyer to pay much less per month than they would with a shorter mortgage. This is because the cost of the house is spread out over so many years.
While things get complex with interest, the crux of the concept is very simple. If a house costs $300,000 and you take out a 30-year mortgage (assuming no interest, which would never happen of course), you would pay $10,000 per year, or about $830 per month. For a 10-year mortgage, you would be paying three times that amount each month, which is $2,500. For individuals or families that don’t have the money to shell out three times the monthly amount of a 30-year mortgage, the longer mortgage is probably a better choice. This is why 30-year mortgages are the most common mortgages in the United States – they incur much lower monthly payments!
To be fair, our example above is overly simplified because there will always be interest on the loan. In fact, the interest will be much more than you expect. The current average rate is just above 3%, meaning that on a $400,000 mortgage with an average interest rate, you can expect to pay over $200,000 just in interest. This makes the house 50% more expensive! The interest part of the equation is pretty unavoidable, but stretching the mortgage out over 30 years at least allows you to pay it via much smaller payments. Opting for a 30-year mortgage leaves you with more room in your monthly budget in exchange for a much higher overall price tag at the end of the loan. Thirty-year mortgages are much easier to qualify for, too, which contributes to why they are the most common mortgage term in the United States.
Advantages of Short-Term Mortgages
Stretching out the mortgage over three decades leads to much smaller monthly payments, as we just noted above. However, there are strong advantages to short mortgages, too. Short mortgages tend to come with much higher monthly payments, which makes them unaffordable for many people. Not everyone has the thousands of dollars of residual income necessary to pay the high monthly installments of a 10-year mortgage. However, for those that do, there are three major advantages.
Firstly, short-term mortgages come with lower interest rates. This means that less money per month will go towards interest, and more money per month will go towards actual equity in the house. These mortgages are harder to qualify for, because the banks are much more selective with short-term mortgages as they are much harder for new homeowners to pay. The financial strength required to qualify for a short-term mortgage is rewarded with lower interest rates.
The second advantage of short-term mortgages stems directly from the first – if the interest rate is lower, the total amount of interest you pay will also be lower. The subtle rate differences between 10- and 30-year mortgages can actually equate to tens of thousands of dollars over the life of the loan, which is a major incentive for home buyers. While the monthly payments are much higher than the payments required by a 30-year mortgage, the total price that the home buyer pays is much less via a 10-year mortgage than it is via a 30-year mortgage.
Finally, short-term mortgages are paid off sooner, leading to faster financial liberty and independence. Owing a bank tens to hundreds of thousands of dollars for a few decades is not a fun feeling for most people, and making the final mortgage payment is a very momentous occasion. For those who choose to take out a short-term mortgage, their moment of independence comes much sooner, freeing up their credit background and their budget for decades to come.
Thanks for reading our post comparing the advantages of long-term mortgages and short-term mortgages! There is no perfect answer to the question of which is better, as it is fully dependent on the financial background of the homebuyer. Short-term mortgages lead to much less interest over the life of the loan, but the monthly payments are significantly higher than the payments on long-term mortgages. Long-term mortgages are the most common type of mortgages in the United States, as they increase the total price of the house but provide more financial flexibility throughout the whole life of the loan.
If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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Written by Zohra
