When you think of refinancing or getting a mortgage, do you automatically think 30-year fixed? Okay, sure, it's easy to understand why - monthly payments on 30-year mortgages are usually lower than monthly payments for shorter-term loans.
But if you can afford to pay more per month for a shorter-term loan, you could save big bucks in the long run since you'll be paying less in interest over the life of the loan.
And to show you just how much you could save, we compared 10, 15, and 20-year fixed-rate mortgage terms with a 30-year fixed-rate mortgage on a $250,000 loan:
30-year fixed mortgage
Interest rate*: 3.625 percent
Monthly payment**: $1,140.13
Total payments made: $410,446.17
Total interest paid: $160,446.17
10-year fixed mortgage
Interest rate*: 2.625 percent
Monthly payment**: $2,370.98
Total payments made: $$284,518.18
Total interest paid: $34,518.18
Savings over the life of the loan vs. 30-year: $125,927.99
15-year fixed mortgage
Interest rate*: 2.750 percent
Monthly payment**: $1,696.55
Total payments made: $305,379.74
Total interest paid: $55,379.74
Savings over the life of the loan vs. 30-year: $105,066.43
20-year fixed mortgage
Interest rate*: 3.500 percent
Monthly payment**: $1,449.90
Total payments made: $347,975.83
Total interest paid: $97,975.83
Savings over the life of the loan vs. 30-year: $62,470.34
As you can see, there's potential for significant savings when you compare shorter-term mortgages with a 30-year term - over $125K if you switch to a 10-year loan, for example.
And while a 10-year loan isn't the right move for everyone, for some, this could be the perfect plan.
"This makes sense if you have a lot of cash in the bank and you can afford the mortgage," says Sam Suliman, CEO of American Frontier Financial group, a mortgage lending firm based in California.
But beware: While shorter-term mortgages often come with lower interest rates, they also have higher monthly payments (as noted in the loan-term comparisons above). For this reason, you need to think carefully about what a short-term loan will mean for you day-to-day, warns Alex Gonzalez, a mortgage loan originator with Vintage Mortgage Group.
"Yes, you want to get out of debt faster, but you also need to make sure your monthly mortgage payment will be comfortable," says Gonzalez.
Plus, you need to take into consideration the potential risks associated with a higher payment. For example, if you lose your job or have unexpected expenses, the higher monthly payment could make things more difficult.
So, how can you determine what loan term is right for you? "Meet with an accountant, a financial planner, and a loan agent to determine what's best," Gonzalez advises. "The financial planner will give you an idea to change your withholding on your paychecks. An accountant will tell you how your taxes will change. And a loan agent will tell you how much you can afford and what your interest rate will be."
That said, if you're looking to refinance or take out a new home loan, carefully consider your options. If you're able to afford the higher monthly payments, a shorter-term loan could be a great money-saving option.
*Interest rates provided by USbank.com, reflecting conforming fixed rates as of February 13, 2013. Conforming rates apply for loan amounts that do not exceed $417,000 or $625,500 in AK and HI.
**All monthly payments calculated using www.mortgagecalculator.org assuming good credit. Monthly payments do not include property tax or PMI.