Is a 40 to 50 Year Home Loan Term a Good Idea
With the price of a home in the hundreds of thousands of dollars, taking on a mortgage seems like good sense to the prospective homeowner. This reduces the huge price tag to a series of manageable payments for most family incomes putting a new home — the American Dream — within their reach. So, how does the prospective homeowner decide what are the best mortgage terms? The right answer takes the talents of a fortuneteller. But for most new homebuyers, doing the right things will keep them on the right track to homeownership.
For most prospective homeowners, the most common choice of mortgage terms is the 15-year fixed-rate home loan which offers a lower interest rate and set monthly payments. There are very few surprises looming around the corner for the homeowner with this mortgage arrangement even though payments will be higher than with a longer-term mortgage. It also offers the new homeowner the advantage of building lots of equity in a short amount of time, which gives the homeowner the ability to borrow against his home in tough economic times, for home renovations, or college tuition.
Though the idea of paying off a home loan as quickly as possible is a sensible thing, the notion of making smaller monthly loan payments on a longer term loan is also very compelling. The strain on the household budget seems lighter and gives the illusion that the homeowner will have more disposable income at hand. Mortgage terms that extend beyond a 30-year fixed-rate have the disadvantage of putting the homeowner at greater risk should the economic situation go bad. That smaller monthly payment is offset by the payments made on high interest rates and will have the homeowner making mortgage payments well into retirement. Equity is lost and the homeowner’s overall financial health is in shambles at a time when he or she should be reaping the benefits of retirement.
In the short term, a mortgage may place more demands on the homeowner, require more discipline, and deny the homeowner a few luxuries. The long-term benefits of the short-term home loan may put that homeowner in stronger financial shape. It just makes more sense than making one’s financial future vulnerable to economic hardship at a time when the homeowner is too old to work or without the savings, assets or equity to protect him or her from hard times.