The Pros and Cons of Different Home Loan Term Lengths

When taking out a mortgage to purchase a home, one of the most important decisions you’ll make is choosing the loan term length The loan term is the amount of time you have to pay off your mortgage. Most home loans today come with 10-, 15-, 20-, 25-, or 30-year fixed-rate terms. There are also adjustable-rate mortgages (ARMs) with introductory fixed rates that can change after a set number of years. Each loan term comes with unique pros, cons, and considerations that you need to weigh when determining the best option for your financial situation and goals In this comprehensive guide, we’ll explore the most popular home loan term lengths so you can make an informed decision.

10-Year Mortgage

A 10-year fixed-rate mortgage is the shortest term available for most home loans today. Here are the main pros and cons of choosing a 10-year loan:

Pros

• Pay off your mortgage faster. With a 10-year term, your mortgage will be paid off in a decade. This allows you to build home equity more quickly.

• Pay less interest. The shorter your loan term, the less interest you pay overall. A 10-year mortgage has much lower interest costs than a 30-year loan.

• Get a lower rate. Lenders offer the best interest rates on shorter term loans because they are less risky. The 10-year mortgage has the lowest rates.

Cons

• Higher monthly payment You pay more each month on a shorter term mortgage because you are paying it off faster The 10-year loan has a significantly higher payment than longer terms.

• Difficult to qualify. Since the monthly payments are higher, you must have the income to afford them in order to qualify for a 10-year mortgage.

• Less flexibility. The large monthly payment leaves less room in your budget should your financial situation change. You have less wiggle room than you would with a longer term.

Overall, a 10-year mortgage works best for buyers who can afford the higher monthly payments in exchange for becoming mortgage-free sooner and paying far less interest. You need the budget for it as well as the discipline to maintain the payments for a decade.

15-Year Mortgage

The 15-year fixed-rate mortgage is another short-to-medium length loan term. Here are its main advantages and disadvantages:

Pros

• Faster repayment than a 30-year loan. You shave 15 years off the standard 30-year mortgage timeframe.

• significantly lower interest costs. You pay much less total interest with a 15-year term compared to longer loans.

• Build equity quickly. Every extra mortgage payment builds your equity faster with a 15-year loan.

Cons

• Larger monthly payments than a 30-year mortgage. The payment is lower than a 10-year loan but higher than a 30-year.

• Difficult for some budgets. You need enough income to handle the larger monthly mortgage payments.

• Less flexibility than a longer term. You have less wiggle room in your budget if money gets tight.

A 15-year mortgage is a good middle ground. Payments are manageable for more buyers than a 10-year term, you still pay the loan off faster than longer terms, and save substantially on interest costs. It offers faster equity building without as much payment shock as the 10-year mortgage.

20-Year Mortgage

The 20-year fixed-rate mortgage has benefits between those of 15-year and 30-year loans:

Pros

• Lower monthly payments than 15-year mortgage. The payment is spread over an additional 5 years, making it more affordable.

• Faster repayment than a 30-year loan. You still pay the mortgage off 10 years faster than the standard 30-year term.

• Lower interest costs than a 30-year loan. Not as low as a 15-year mortgage but still much less interest than a 30-year term.

Cons

• Higher interest costs than a 15-year mortgage. You will pay more total interest than you would with a 15-year loan.

• Larger monthly payments than a 30-year mortgage. The 20-year loan does not offer payment relief like a 30-year term does.

• Less flexible than longer terms. While more budget-friendly than 15/10-year mortgages, the 20-year term still offers less wiggle room than a 30-year loan.

The 20-year mortgage hits a sweet spot between the affordability of a 30-year loan and the faster equity building and interest savings of a 15-year mortgage. It’s a good option if you want more advantages than a 30-year term offers but cannot swing the 15-year payments.

25-Year Mortgage

The 25-year mortgage is less common than other terms but can provide a happy medium in certain situations:

Pros

• Lower monthly payments than 20/15 year mortgages. You gain payment relief by stretching the term out to 25 years.

• Build equity faster than a 30-year loan. You still repay the balance quicker than a 30-year mortgage.

• Lower interest costs than a 30-year mortgage. Not as low as shorter terms but still less interest than a 30-year loan.

Cons

• Higher monthly payments than a 30-year mortgage. The 30-year term offers the most payment relief.

• Higher interest costs than 20/15 year loans. You miss out on additional interest savings with a 25-year vs shorter terms.

If your budget is too tight for a 20-year term but you still want to pay off your mortgage faster than a 30-year, the 25-year loan can be a good compromise. You get payment relief while still paying less interest and owning your home outright faster than the 30-year mortgage.

30-Year Mortgage

The 30-year fixed-rate mortgage is the most popular home loan term length. Here are its pros and cons:

Pros

• Lowest monthly payments. Stretching repayment over 30 years results in the most affordable monthly payments.

• Easiest to qualify for. The low payments improve affordability and chances of approval. Ideal for first-time and low-to-moderate income buyers.

• Most flexible. Low payments free up more room in your monthly budget and give you breathing room if money gets tight temporarily.

Cons

• You pay the mortgage for 30 years. It takes substantially longer to pay off the balance vs. shorter term loans.

• Highest interest costs. Stretching payments over 30 years means you pay the most interest.

A 30-year term is best for borrowers prioritizing low monthly payments or those who need 30 years to pay off their mortgage comfortably. While you pay more interest, the low payments provide the most budget flexibility. It’s ideal for first-time buyers or anyone who anticipates changes in income or expenses over the loan’s life.

Adjustable-Rate Mortgages

ARMs offer fixed introductory rates for set periods, usually 5, 7, or 10 years. After the initial fixed-rate period, the interest rate becomes adjustable yearly based on market conditions.

Pros

• Lower introductory rates than fixed-rate mortgages. This makes payments more affordable at the start of the loan.

• Flexibility if you sell before the rate adjusts. ARMs can offer lower payments if you only need the mortgage for the initial fixed-rate period.

Cons

• Unpredictable payments after adjustment. Once the fixed period ends, your monthly payment can fluctuate significantly based on rate changes.

• Higher long-term interest costs. ARMs typically have higher rates than fixed mortgages over the full 30-year term.

ARMs make sense for borrowers who plan to move before the rate adjustment and want to benefit from initial lower payments. They are riskier if you plan to keep the mortgage long-term since payments and rates become unpredictable.

Key Factors in Choosing a Mortgage Term

There are several key factors that should guide your mortgage term decision:

• Your budget – Choose a term based on the monthly payments you can realistically afford. Make sure to account for taxes, insurance, and other debts.

• Your plans – If you may move in the next 5-10 years, an ARM or shorter term mortgage could offer lower rates and interest costs. If staying long-term, a fixed rate is safer.

• Interest rates – Weigh current interest rates on different terms. Sometimes shorter terms offer only marginally lower rates, meaning longer terms become more appealing.

• Your financial goals – A shorter term can help you build equity faster to leverage for other goals, but higher payments might limit what you can save or invest each month.

• Future plans – Think about upcoming expenses like college tuition or retirement. Will you need budget flexibility? How long will you need the mortgage payments?

The right loan term depends on your unique situation. Evaluate both your short and long-term financial forecast, goals, and budget to choose the one that best balances affordability, flexibility, and interest savings. Shop for quotes on multiple terms to make sure you get the optimal mortgage structure. With an understanding of the pros and cons of each, you