Back To Basics: Mortgage Term

mortgage termA mortgage term is the length of time that both parties have to abide by the mortgage contract. This protects both the borrower and the lender. Once a mortgage term is up, if balance remains on the mortgage, it must be renewed, refinanced, or paid off.

Most people all over the world will have several mortgage terms before they are out of debt.

How Mortgage Terms Protect You

Mortgage terms lock the terms of the mortgage in writing. In a fixed-rate mortgage, your bank cannot change your interest rate until the term is up. In an adjustable-rate mortgage, your rate will only change for specific reasons, like a change in prime.

Longer terms have higher mortgage rates, but they have the benefit of “locking” in their rates. This protects you from risk of interest rates shooting up in the future. Alternatively, a shorter mortgage term carries a lower rate, but you run the risk of being forced to renew at a much higher rate.

How Mortgage Terms Protect Lenders

Mortgage terms carry required payments that allow the lenders to predict their gains over the term. These payments can be limited to a maximum, as in a closed mortgage, or open to early repayment, as in an open mortgage.

With an open mortgage, the lender runs a risk of not making their predicted gains. If you pay the mortgage off very early, they will lose out on interest payments. As a result, lenders typically offer higher interest rates for open mortgages.

How to Choose a Mortgage Term

Most experts advocate choosing a fixed-rate mortgage with a term less than 5 years. 1-year mortgages offer the most risk, but also tend to have the lowest overall costs. 4-year mortgages often offer very competitive rates, compared to 5-year terms, and are only a little riskier.

In most cases, a closed-term mortgage is the best option. The extra savings make up for the lack of flexibility. An open mortgage is only a good idea if your household has highly variable income and can expect to have money to spare to make extra payments every few months.

When a Mortgage Term Ends

Although you can renew with your lender, you can also refinance through a different lender. Shop around when your mortgage term is coming due and see if you can do better with a different institution.

Choosing the right mortgage is as important as getting a good mortgage rate and it depends on mostly individual circumstances of the person who borrows. It can depend on the risks he or she may face in future, their income & expenses and debt levels. Good mortgage term varies for different people, as a good mortgage term for one may not be good for another.

If you don’t have a complete surety about what mortgage term to choose, it is better to consult a good mortgage broker and discuss your financial situation with them. They will help you to choose the right mortgage term that won’t affect your financial situation.

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