Since home loan terms are generally standardized at 15 or 30 years (there are 20 and 40 year loans, but they’re not common), most people don’t give any thought to the importance of loan terms. The term, however, influences many more prominent financial aspects of a home purchase, so it is important to consider.

First, and most obviously, a longer loan term can mean lower monthly mortgage payments. If you pay $200,000 over the course of 15 years, you pay about $2,000 per month (including interest and taxes and insurance). If you pay it over the course of 30 years, you pay about $1,500 per month (including interest, taxes and insurance). Note the difference in payments. For about 25% more a month, you can own your house free and clear in half the time. Also, if you can afford a couple extra hundred dollars per month, you can save yourself a lot of interest.

Second, the length of a loan term affects how much interest you pay on your loan. It does so in two ways. Most simply, the longer the loan term, the longer you owe money, so the more interest you pay. A more subtle factor is that a longer loan term is more risky for a lender, so the lender will charge more interest than it would with a shorter loan term. (Ideally. Lenders take all sorts of gambles with high-risk loans that sometimes cause this to be untrue). Either way, a longer loan term means you end up paying more for your house.

Third, if a long loan term is risky for the lender, it can also be risky for the borrower. It is not common for a house to depreciate over time, but it is common for houses to appreciate more slowly than anticipated. That is, when you pay off your mortgage your house is not likely to be worth less than the amount you borrowed to purchase it, but the cost of interest over the mortgage term may have eaten up your appreciation so that you only break even or make a very small amount of profit for your investment.

Finally, remember that though most traditional lenders make loans with 15 or 30 year terms, most seller-financed deals have terms of 10 years or less. At the end of the term, the buyer must make a balloon payment to the seller of the entire remaining amount. Usually, the buyer then finances the balloon payment with a traditional lender. This is a great way to get a non-traditional term length that might better suit your finances. As well, you may end up spending less money on interest overall because seller-financed, short-term balloon mortgages tend to have lower interest rates than traditional loans, and when you finally take out a traditional loan you will be able to do so for a shorter term at a lower interest rate.

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