When it comes to the terms of mortgage loans, the 30-year payment plan is the most common choice. You may be thinking a 30-year mortgage is the only available option. However, this is not necessarily the case. Take a look at why the 30-year loan is so popular and what some of the alternatives are.
How 30-Year Loans Dominate
The dominance of the 30-year structure is a case where the market has found an equilibrium. Banks aren't especially wild about longer terms, although 40-year mortgages are something you may be able to consider. If a bank accepts a 40-year deal, they may want to see a higher interest rate because the longer-term exposes them to the risk the customer might not live to finish it. That can incur costs dealing with estates, and that's not something banks normally want to get into.
If there is an alternative to the traditional 30-year mortgage, it's a 15-year loan. However, the 15-year structure creates pressures on many borrowers. If the loan is half the length, then you would expect to have to make twice the monthly payment to offset the shorter term. Someone looking at a $600 monthly payment, for example, suddenly is facing a $1,200 payment. Even if you can afford it, there's usually an argument for spreading the hit across more years.
Pick a Term
Although 30-year mortgage loans are the standard, nothing prevents you and the bank from negotiating whatever payment structure is feasible. There isn't much argument for it, but nothing prevents you from negotiating a 5-year loan if you can prove you have the income to make the payments. Notably, a 20-year term is becoming a bit more common as an in-between option between the popular 30 and 15-year deals.
Normally, shorter terms lead to lower overall borrowing costs. If you're not tacking on interest for an additional 15 years, that amount doesn't accumulate. The net effect is a cheaper overall borrowing cost.
Frontloading Payments on a 30-Year Agreement
It's also notable that a large down payment on a 30-year mortgage is likely to net you a lower interest rate. Consequently, someone who can afford a shorter term may want to use that money to obtain better financial terms. If they have the additional cash flow they want to put toward payments, they're welcome to do so and just pay the loan off early.
A major upside to this kind of approach is it provides flexibility. If your income changes, for example, you'll be able to make the lower standard payment because you were already paying above it.
Reach out to a local mortgage company to learn more.