Mortgage terms refer to the amount of time used to calculate the payments that it will take to pay off your loan in full under the existing structure of the loan. A mortgage term, in most cases, is the same as the maturity, which is defined as the time when the final payment to pay the loan off 100 percent is due. However, the mortgage terms and the mortgage maturity are not always the same.
How Mortgage Terms Works
In the vast majority of mortgages, the term is the period of time it will take to pay the loan in full. For example, in 15 year term mortgages, your loan has a 15 year term which means your monthly payments are calculated to ensure you will pay off the loan in 15 years. If you make your payments on time, you will have the loan paid in full after this 15-year term, and your final payment when the loan reaches the maturity will be similar in dollar amount to all of the other payments you have been making.
This is true whether you have a fixed rate or adjustable mortgage; the difference is that in a fixed rate mortgage, your payments stay the same while in an adjustable rate mortgage, your payments adjust if the interest rate changes to ensure you will still pay off the loan by the end of the 15 year term.
Balloon mortgages are the major exception to this rule. A balloon mortgage usually has a 30-year term, which means your payments are calculated to ensure you will pay off your loan in full in 30 years. However, the maturity of your mortgage – or the date when you have to pay the full remaining balance on the loan- is usually within 5 or 7 years. Therefore, you will have a very large payment to make at the end of 5 or 7 years unless you refinance your mortgage.
How Mortgage Terms Affect Payments
Typically, the longer the mortgage term, the lower your monthly payments. This is because you are paying a smaller amount of principle each month if you have 30 years to pay off your principle, as opposed to a shorter period of time. While other factors also impact your monthly payments, such as interest rates, extending your mortgage terms is usually the easiest way to lower your monthly payment. However, remember that with longer mortgage terms, you will pay more interest over the life of the loan.
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