Many financial advisors recommend taking out a shorter-term loan. Why? Because over the life of the loan, less interest is paid to the mortgage company. That makes sense. Less interest is always good, right? But with a shorter-term loan, there’s a tradeoff. The shorter the term, the higher the monthly payments. Why is that, exactly?
Monthly mortgage payments have three basic components. The first is the actual loan amount. The second is the interest rate on the loan. The third is how long the loan is actually amortized over. Amortization simply means how the loan is paid down and when. Most mortgage loan terms in today’s mortgage marketplace are the traditional 30-year fixed. When you see interest rate advertisements, it’s usually the 30-year term that’s being promoted. The second most popular is the 15-year term. Other terms fall into the 20- and 25-year category. A 10-year note is also available. There are also programs that can customize a loan term based upon how many years remain when analyzing a refinance.
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