Mortgage amortization (pay-back) periods are getting longer. Typical mortgage pay-back periods are between 15 and 30 years. But in response to higher real estate prices, lenders have been providing longer mortgages, in some cases up to 40 years.
Should you get the longest mortgage pay-back period possible? Have a look at the chart above, which shows an example of what happens with different mortgage lengths. The figures are based on a purchase price of $408,100 with 20% down, for a loan of $326,480
PROS: If you get a longer mortgage, you may qualify to buy a higher-priced home, which makes sense if you absolutely must purchase at a higher price. It also makes a bit more sense if you plan to keep the home at least 10 years. Also, with rates rising, the top interest rate for a longer mortgage today may be lower than the rate for a shorter mortgage in the future (but that’s not a certainty).
CONS: Unfortunately, you’ll pay more for that home, because you’ll pay a higher interest rate for the “privilege” of the longer loan. You’ll be paying for many years longer before you get to be “free and clear.” And if you want to sell within 10 years (a typical period of ownership for young adults), you’ll have less equity, and may even be upside down if home prices fall significantly. It often (but not always) makes better financial sense to get the shortest loan you can.
What can you do instead of getting a longer mortgage? Buy a cheaper property, save a higher down payment, buy an investment property in a different location, or co-borrow/co-buy with someone (a parent?) so you qualify for a shorter mortgage.