Selecting the term

Whenever you have the choice, select the shortest possible mortgage term. An abbreviated term will help you get the best mortgage rate, which means that the overall cost of the loan will be less than longer term plans.

An example should illustrate this principle. Consider Kelly, who wants a $150,000 fixed-rate mortgage. She is offered the choice between a fifteen and thirty-year terms. With the fifteen-year term, her monthly payments are higher. At the same time, she would qualify for the best mortgage rate, which is quite low. The thirty-year term, on the other hand, featured cheaper monthly payments and a higher interest rate. As a result, Kelly would ultimately pay far more money for the thirty-year term. The shorter term is, in this case, an easy decision.

Of course, you may not be in a position to finance a shorter term. Your other expenses might preclude the higher monthly payments. If that is the case, do not worry too much about accepting the longer term. While you may not receive the best mortgage rate, you will still have the option to prepay. Prepaying helps you build equity more quickly.

If you have a thirty-year term and you find that you are able to prepay on a regular basis, it may be time to consider refinancing. By selecting a shorter term, you should be able to get the best mortgage rate. Not only will the lower interest rate help you save money, but you will be able to pay off your loan more quickly, freeing up the money you previously paid toward your mortgage for investments or other purchases.