What Should Your Mortgage Length Be?

Everyone’s heard different things when it comes to paying off a mortgage; some claim it’s best to have a really long mortgage in order to increase your savings with lower monthly payments while others say that the freedom you get from paying off your mortgage as quickly as possible is what you should be striving for. So what is the truth about mortgage length?

While there is no set in stone rule for what your personal mortgage length should be, the overall school of thought seems to be that it’s better to pay it off faster.

How Long is the Average Mortgage?

Most mortgages span between 15 and 30 years, but some can even go as long as 40. While mortgage interest rates tend to be low, you still want to do everything you can to avoid dragging it out that long as you end up paying considerably more in interest than you should be. Your house is expensive enough as it is, why add to the cost?

Review Your Finances Before Making a Decision

Mortgages generally tend to have manageable low interest rates (your mortgage debt is meant to be something you can live with without too much financial stress or burden). If you’re struggling with other debts with higher interest rates (credit card debt, student loans, auto loans, lines of credit) it’s better to pay them off (or pay them down) before throwing yourself at tackling your mortgage.

You also want to make sure you have enough saved up in an emergency fund should the unexpected happen. There’s nothing worse than agreeing to high monthly mortgage payments only to lose your job three months later. Be prepared. The general rule of thumb is having a minimum of 3 months worth of income saved up.

Calculate Your Options

Before deciding on the length of your mortgage, crunch the numbers for different durations to see what your budget can handle. If you find that you are, in fact, able to handle payments on a 20 year amortization period without breaking the bank (or breaking a sweat) then it makes much more sense to choose that option of a 30 year mortgage (where you’ll also end up paying even more in interest).

On the other hand, if the only way you can possibly afford to buy your house is with a 40 year amortization period, you have a problem. The house likely isn’t within your means, and it’s best to downsize or look in a different, more affordable location.

Why You Should Consider Paying off Your Mortgage Early

The sooner you completely own your own home, the more money you save in Interest costs. You also have the freedom and peace of mind that comes with possessing equity that belongs entirely to you. In addition, without mortgage payments weighing you down, you’re free to start saving money for other things (be it a vacation in the South of France, a new car, or your retirement fund).

Just make sure that you won’t be punished for paying off your mortgage early. Some longer term contracts come with prepayment penalties (meaning you’ll incur extra fees from the bank for paying off your loan early). Check if you have an open or closed mortgage and read the fine print to make sure that you won’t come up against any unpleasant surprises.

If you can, it’s best to put down a substantial down payment up front. This way, you can still swing affordable monthly payments but the duration of your loan will be considerably shorter. If you can afford it, a 20% down payment is a fantastic way to get a jump start on your mortgage, but 10 – 15% can also have a considerable impact (and will help greatly lower insurance fees).

General Tips

  • Shop around when you’re looking for a good interest rate. Don’t just stick with your existing bank because it’s convenient.
  • If the thought of haggling makes you uncomfortable, get a mortgage broker. They’re paid a finder’s fee by the lender so there’s no charge for pre-approval, no obligation, and the service is completely free for you.
  • Make sure there are no prepayment penalties if you’re planning on paying off your mortgage early and pick the right amortization period for your budget.
  • Invest in a mortgage that lets you make extra payments throughout the year so you can put aside any extra money you might come across without being penalized.