The Right Loan Term

Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series. Last week, we discussed the concept of an “exit strategy” when buying a home. That means that before you get into the house, you need a plan to get out of the house. Kind of like a pre-nuptial agreement for your home.

Part of that “exit strategy” should include planning for how much the mortgage balance will be when it’s time to sell. That means that the mortgage should be integrated into the exit strategy and home ownership plan. While it’s nice to have the lowest possible payment, it’s also nice to have the lowest possible mortgage balance left to pay off when it’s time to move on. If someone buys a home at age 40 and plans to retire at 65 and continue living in that home, it seems to me that a 25 year mortgage makes more sense than a 30 year mortgage.

For as long as I can remember, thirty years has been the “standard” length of most mortgages. Lenders advertise fifteen year mortgages, but most people are not aware that mortgages of any length are available. The shorter the loan term, the lower the rate and the faster the principal balance will decline. The longer the term, the higher the rate and the longer it takes to begin making a significant reduction in the principal balance, but the monthly payment is lower. When values were rising rapidly, there was discussion about whether 40 year mortgages made sense to keep payments more affordable.

Lately, I’ve been wondering if it’s time to retire the thirty year mortgage since most people don’t stay in their homes beyond 10 years. With the high cost of college, many middle-class families sell their homes (which they probably shouldn’t) in order to pay for college. At the most, those families probably only live in their homes 15-20 years. A shorter mortgage term would give them more equity when they sell.