What Is a Loan Term?

When you take out a mortgage, you’re agreeing to repay the borrowed amount of money to a lender over a set amount of time with interest. A loan term is the amount of time you have to pay back the loan. Loan terms can vary widely, but some of the most common terms are 15, 20, and 30 years. The term you choose impacts how your monthly payments are structured and the total amount of interest you’ll owe.

How long is a mortgage loan term?

A mortgage term can be as long as 50 years or as short as 5 years. The length of time you have to repay a mortgage ultimately impacts the total cost of the loan. The loan term that is right for you depends on how long you plan to live in the home, how much you’re comfortable spending each month, and how quickly you want to pay off the loan.

Short-term mortgage loans

A mortgage with a term less than 15 years, such as a 10-year mortgage, is typically considered “short-term”. Short-term mortgages are not affordable for everyone, making them less common among borrowers. While monthly payments are higher, short-term mortgages can save you money that would otherwise get lost to interest.

Pros:

• Build equity faster
• Pay off your mortgage debt faster
• Less money goes toward interest

Cons:

• Higher monthly payments
• Higher interest rates

Long-term mortgage loans

A long-term mortgage is any loan with a term of 15 years or more. Long-term mortgages are most common, especially 15 and 30-year mortgages. Monthly payments are more affordable, offering flexibility for those who are tight on funds or plan to live in their home longer.

Pros:

• Lower monthly payments
• Lower interest rates

Cons:

• Takes longer to build equity
• Pay off your mortgage debt slower
• More money goes toward interest

How do mortgage terms affect payments and interest?

A short-term mortgage will help you save on interest over the loan term and build home equity faster, but typically requires higher monthly payments. On the other hand, a longer-term mortgage provides lower monthly payments, but results in paying more interest over time. To better understand how different loan terms impact monthly payments and total interest costs, consider the following loan scenario for a $250,000 mortgage with a 5% fixed interest rate:

In this example, the 30-year loan term offers the lowest monthly payment at $1,342, saving $636 per month compared to the 15-year term. However, you’d pay $127,741 more in interest over the life of the loan by choosing the 30-year mortgage.

Let Zillow do the math for you with the below Amortization Calculator.

Terms and conditions of a mortgage loan

Before finalizing a mortgage, it’s important to understand the terms and conditions that will affect your repayment. Each mortgage comes with specific details regarding payments, fees, and interest rates that determine the total cost of your loan. When asked about five common homebuying costs and fees, a 2024 Zillow survey of buyers revealed that 91% did not fully expect to pay at least one during the home purchase process. Knowing these conditions will help you avoid unexpected costs and ensure that your loan aligns with your financial goals. Here are some key terms to know:

• Term length: The duration of the loan, such as 15, 20, or 30 years.
• Monthly payment: The amount you must pay each month toward the principal and interest.
• Fees: Additional costs associated with the loan, such as origination fees and late payment penalties.
• Annual percentage rate (APR): A measure of the total cost of borrowing, including interest and fees.
• Due date: The date each month by which your mortgage payment must be made.
• Interest rate: This determines how much you’ll pay in interest over the life of the loan. Some loans have fixed rates, while others adjust periodically.
• Closing costs: Fees due at the time of closing, including appraisal fees, title insurance, and lender charges.

Can you negotiate loan terms?

Yes, many aspects of a mortgage loan can be negotiated. Mortgage lenders may be willing to adjust certain loan terms based on your financial profile and market conditions. One of the most commonly negotiated terms is the interest rate, which can have a significant impact on your overall loan costs. Borrowers with strong credit scores and stable financial backgrounds often have more leverage to secure lower interest rates. Additionally, you may be able to negotiate your loan term length, closing costs, and certain fees such as origination fees. Shopping around and comparing offers from multiple lenders can help you find the best possible mortgage terms.

How do I choose a mortgage term?

Choosing the right loan term is crucial for your financial well-being. It affects how much you pay each month, the total interest over time, and your long-term financial flexibility. Whether you prioritize lower monthly payments or paying off your home sooner, understanding your mortgage loan term can help you make the best decision for your future.

• Consider how much you can comfortably afford to spend each month on a mortgage
• Consider how long you want to wait to pay off your mortgage
• Consider current interest rates for different loan terms
• Consider whether you can refinance later on
• Consider whether you can afford to make extra payments to pay off your loan early

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