15-and 30-year terms

This simple guideline will serve you well as you shop for a mortgage: a relatively brief term will result in the best home mortgage rate. That’s because you will pay more interest if the loan is stretched across a greater number of years.

The downside, of course, is that monthly payments tend to be higher with a shorter term. Some borrowers cannot afford the relatively steep payments.

Here’s an example: Suppose that Layla selects a $300,000 mortgage with a fixed rate. When presented with the choice between a 15-and 30-year term, Layla consults with her lender. She discovers that the 30-year term would make her payments lower, but her home mortgage rate and the overall cost of the loan would be more expensive. With the shorter, 15-year term, Layla’s rate and the overall cost would be lower. Because of her budget, Layla decided to go with the longer term.

If you don’t have enough money to make the higher monthly payments, then obviously the shorter term is not going to be your best option. Don’t stretch your budget too tight to accommodate the bigger payment. Keep in mind that you can always prepay during months when you have an abundance of cash.

With some loans, you may be able to refinance to get a shorter (or a longer) term. Refinancing to obtain a shorter term is often the easiest way to obtain the best home mortgage rate. Alternatively, you may refinance for a longer term. This is a great option for people who are having a hard time making their monthly payments.