There are many different reasons to buy homes, whether you are the first time homebuyer looking for a place of your own, looking to start a family or even looking at the purchase as an investment, they all carry the same loan products and terms but there are differences.
By choosing a shorter term not only does it generally offer a lower rate, but there may be even lower costs as well. For conventional mortgages (the use of Freddie Mac or Fannie Mae directly) these entities charge what is called "loan level pricing adjustments" or "post settlements delivery fees." These fees can impact you in a number of ways. An example would be if you want to finance for 30 years, have a credit score between 720-740 and are putting down 20% for your purchase there is additional fee of .50% points (equates to $500 on a $100,000 loan). For the same scenario but choosing a 15 year term, there is no fee.
Another way to look at it, if you can afford to handle a shorter term, is how much you will repay over the life of the loan. Look at this example:
Scenario 1. $150,000 loan @ 4% for a 30 year term.
Scenario 2. $150,000 loan @ 3.25% for a 15 year term.
Scenario 1 offers a monthly principle and interest payment of $716.12 a month. Now if you make your payment on time each month you will pay $257,804 over the life of your loan for your investment.
Scenario 2 offers a monthly principle and interest payment of $1,054 a month. The payment would be higher in this scenario because the term is half as long although not drastically enough to make you not consider it right? Here is where you would save - the repayable amount if you made your monthly payment on time each month is $189,720. This option saves you over $68,000.
Always look at the picture from every angle to find out what is right for you now and in your future because buying a home is truly an investment. One common thought I hear is that "I want the lowest payment". Well, we all do, but my example shows a good reason that it may be better to go a different avenue if your budget allows. Another advantage to look at a shorter term is that if you know the home you are buying will not be your last, the shorter term allows you to pay less interest, therefore paying the principle balance down quicker. If you stay in the home for 5 years and made your loan payments on time, Scenario 1 from above would have your payoff around $132,445 after the five years and Scenario 2 would have the payoff around $98,580. That means that if home values stayed the same since you purchased the home, you would receive more money back from the sale of the home in Scenario 2 to use towards your next home.
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