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People tend to go with the flow and take mortgage loans without taking into consideration the type of loan that would best serve their interests. They often fall prey of salesmen and lenders who just want to get the most out of the transaction and they fail to understand that a mortgage loan is a financial transaction with consequences that will affect the borrower’s financial life for many years. Thus, one should not apply for long term mortgages tempted by the small payments
without considering whether a short term mortgage could be more advantageous or not.
Short Term Mortgages
Banks tend to default to home loan terms which are advantageous for them, not to you. These loan terms usually last 25 or 30 years. There may be many reasons for them to suggest you such long terms but what you need to consider is whether you want to be a debtor for such a long time or not and whether you want to spend so much money on interests over the whole life of the loan. Bear in mind that by the end of the repayment program you will have paid the lender many times the value of your property.
Instead, short term loans may feature higher monthly payments but clearly, you pay less in terms of interests over the whole life of the loan. Which loans are considered to be short term loans? The most common loans on this category are: 5 year loans, 7 years loans and 10 years loans. The last ones could be grouped in a middle term category but all in all, this is the usual classification.
Fast Repayment, Secure Repayment
The best approach to mortgage repayment is of course to cancel your debt as soon as possible. However, as usual in your financial life, you need to keep a balance between risk and profit (less expenses in this case). Settling for too high monthly payments can compromise your ability to repay the loan and you may risk default. It is wiser to aim for moderate payments even if you end up paying higher overall interests.
Finding that balance may not seem easy but there is no reason for setting hurdles. To find the loan terms that best suit your needs you just have to contact a couple of lenders and request different loan quotes from them with varied repayment programs. Once you have the resulting monthly payments, you can compare them to your income to decide which offer best adjusts to your budget.
The Rate Type Issue
If you select a variable interest rate instead of a fixed rate in order to obtain lower monthly payments there is an additional precaution that you need to take. Even though that interest rates seem to be heading down and nothing points towards a reference rates increment in the near future, it can happen and even if it does not happen soon, your repayment schedule will last at least five years and interests can sky rocket in less than that. Therefore, it is advisable that you leave room in your budget for a sudden increase on your monthly payments and eventually, consider a longer repayment program if you would not be able to afford the payments in case of an increase on the rate.
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