How many years in a mortgage?
The first time you take a home loan, it can all be a little bewildering. Although you learn from your first experience, it can still be confusing the second or third time round. So, to help you find the best mortgage deal, let’s have a quick look at one of the most important variables. This is the term of the loan. This gives you wiggle room to get the best deal. Loans are usually offered for terms of up to thirty years, i.e. you repay the capital plus interest on the reducing balance for the agreed period of time. A long term is good because, by spreading out the repayment of the capital, you bring the monthly instalments right down. Thus, if you borrow $100,000 over ten years, the monthly repayment is $833. Take the same loan but repay over thirty years, the cost is $278 per month. But, the longer that capital is outstanding, the more interest you pay. So, like all deals, it’s up to you to use a mortgage calculator and work out which is more important: lower monthly instalments or saving on the overall cost of borrowing.
The other factor in play is inflation. This affects you in two ways. When you took out a loan for, say, $250,000 in 1978 that was a large chunk of cash. Today, the purchasing power of the dollar has changed somewhat and that same amount is only modest. Thus, with a longer term you are betting that your earning capacity will improve and the mortgage repayments will slowly take up a smaller part of your income. The second effect gives you a capital gain. Despite bubbles that rise and collapse, the overall trend of resale values has been to rise over decades - thinking short term on investments in real estate is dangerous. In theory, this gives you an increasing equity in your home, i.e. the difference between the resale value and the amount of the loan secured on the property. This has major advantages as an asset or as savings. As an asset, it’s available as security for any loan in the future. As savings, you can cash out in a home equity loan and buy an annuity for your retirement.