Short-Term Mortgage or a Long-Term Mortgage? What Makes Sense?
Your decision about a home mortgage may be the most important financial decision you will ever make.
For most borrowers, a mortgage is the largest amount of money they will borrow, and the interest rate and repayment terms of the note have a huge financial impact. Use these tips to decide on a long-term or a short-term home mortgage loan.
Here’s the critical issue:
A loan with a longer repayment date will require more total interest payments over the life of the loan. On the other hand, if you take out a mortgage that is too short-term, you may struggle to make the payments every month.
So, what to do?
The Short-Term Option
Choosing a shorter mortgage can make sense, but it depends on your financial situation.
Can you afford to make the higher monthly principal and interest payments, given your monthly income and expenses? In addition, you need to consider your career situation, because you’ll need a steady amount of income to make the mortgage payments.
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If you were to lose your job, you would not be able to afford the payments- and you wouldn’t be able to qualify for refinancing, either. This can put you in some serious financial trouble, so you want to think about how a higher mortgage payment will impact your goals for the future.
If you want to have your mortgage paid off so that you can leave something to your kids, you should look into a living trust law firm, as they will be able to work with you to make sure that you are making the best decision to facilitate this goal. By planning now, you can help to ensure the best results for the future.
Does Long-Term Make Sense?
Extending your mortgage or taking out a mortgage over a longer period of time does give you more room to save up some money, and you may even qualify for some tax benefits. If you’re comfortable paying off your home after retirement, a longer mortgage may make sense. Remember that you also have the option of paying it off sooner, if you’d like.
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Taking out a longer mortgage may make sense if you are younger, or if you are buying your first house. Your life may change a lot over the next few years, and you may find that you are able to earn a higher income sooner than you’d think. You can use the higher income to pay down your existing mortgage loan at a faster rate, or to refinance your loan to a shorter term.
Need a Budget?
Regardless of which type of mortgage you choose, it’s critically important to create a monthly budget and stick by it. Take a look at your bank statements and credit card activity for the past three months, and use the information to create a personal budget. You can use a mobile app, or simply write down spending categories on a sheet of paper.
Your budget should include each spending category, and average dollar amount you’ve spent over the last three months. Some categories, such as your mortgage and car payment, will be fixed amounts, while meals and entertainment expenses will be variable.
Take a close look at your variable expenses and make some cuts. Maybe you go out to dinner once a month, rather than three times, or your start making coffee at home a few days a week, instead of Starbucks. Use your expense cuts to fund a savings account that you can use for emergencies.
With proper planning, you can stick to a monthly budget and find the right mortgage for your needs.
This post is for educational purposes only.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
Co-Founder: accountinged.com
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
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