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Loan term is the number of months or years a home buyer’s mortgage loan lasts.
A mortgage loan term is the period, expressed in months or years, over which a home buyer must pay back their original principal balance plus interest.
Except for USDA mortgages, which only allow 30-year loan terms, home buyer can choose their mortgage’s loan term.
The three most common mortgage loan terms are:
Other loan terms, including 25-year and 10-year, may also be available depending on the mortgage type.
A mortgage’s loan term affects its mortgage rate, monthly payment, and pace at which equity is built in the home. A loan with a shorter term will have a higher PITI and pay off faster. Conversely, a loan with a longer term will be more affordable monthly but take more years for a buyer to own their place free-and-clear.
The majority of first-time home buyers choose a 30-year loan term. Since 2018, conventional mortgage rates average 41 basis points higher for 30-year loan terms compared to 15-year terms.
You can find more mortgage statistics here.
Loan Term | Market Share |
10 Year Loan | 0.24% |
15 Year Loan | 3.37% |
20 Year Loan | 1.01% |
30 Year Loan | 93.42% |
Other Loan Terms | 1.96% |
Imagine a first-time home buyer choosing between a 15-year and 30-year mortgage loan term for their upcoming purchase.
The 15-year term looks attractive because the buyer will build home equity and own their home faster. However, because the mortgage payback is compressed into half as many years, monthly payments are larger and eat into the home buyer’s housing budget.
After careful consideration, they decide that choosing a 30-year mortgage is the more prudent path, offering lower monthly payments, a boost in purchasing power, and the ability to send optional extra payments to pay down their balance at any time in the future.
Shorter mortgage loan terms typically result in higher monthly payments, with less mortgage interest paid over the life of the loan. Longer mortgage loan terms typically result in lower monthly payments and more mortgage interest paid.
Once a mortgage is closed, the loan term is generally fixed. However, refinancing can change the loan term, but this involves taking out a new mortgage.
Shorter loan terms save money for home buyers but may be worse for them because shorter loan terms mean higher monthly payments. If you cannot manage the mortgage payments of a shorter loan term, you could default and lose your home to foreclosure.
Generally, mortgages with shorter loan terms come with lower interest rates. Lenders offer lower rates for shorter terms because the loans have less perceived risk to the bank.
Making extra payments to pay off a mortgage early reduces a mortgage’s interest costs. However, in rare cases, your loan may have a prepayment penalty, so check with your lender first.
This article, "What is Loan Term?" draws on the author's professional mortgage experiences and references information found at these authoritative websites:
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What is a Starter Home?
Loan term is the number of months or years a home buyer's mortgage loan lasts.
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