Loan processor Nicole Dennis works at Arcadia Lending in Clawson Nov. 15. Mortgage loan originator David Graciak said a 30-year mortgage term is “by far the most popular for anyone purchasing a home.”

Loan processor Nicole Dennis works at Arcadia Lending in Clawson Nov. 15. Mortgage loan originator David Graciak said a 30-year mortgage term is “by far the most popular for anyone purchasing a home.”

Photo by Patricia O’Blenes


Loan experts discuss the 30-year mortgage versus shorter-term loans

By: Mark Vest | Metro | Published November 24, 2021

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METRO DETROIT — The process of preparing to purchase a home is an exciting time in the lives of many people.

Whether someone is looking to purchase a property for the first time or seeking to downsize or upgrade, buying a home represents a big change in life.

For many, the first step in the process of this life-changing journey is speaking with a mortgage lender about getting preapproved for a loan.

Aside from inquiring about things such as a desired price range and job status, lenders are likely to ask individuals applying for a mortgage about what their preference is regarding the term length of a loan.

There are a variety of options to choose from, with 15- and 30-year terms being two of them.

“Typically, when you’re buying a house, you’re not (going to) do a 15-year term, just because that payment’s pretty expensive, obviously,” said David Graciak, who is a mortgage loan originator at Arcadia Lending in Clawson. “The 30-year mortgage term, they offer it for a reason. It’s by far the most popular for anyone purchasing a home.”

The reason for the popularity of a 30-year term is that it gives homeowners the lowest possible monthly payment.

Michael Halker is a mortgage loan originator at Reliance Financial Group in Troy, and he concurs that 30-year terms are the most popular.

“One of the main advantages of a 30-year is it gives you the opportunity to have the lowest overall mortgage payment possible, because it’s spread over the course of 30 years. Some people see that as an advantage,” Halker said. “Some people can only afford the payment on a 30-year amortization, but they wouldn’t qualify for, say, a 20-year or a 15-year because the payment would be higher.”

Graciak said that, after the 30-year option, the next most popular choice for homebuyers is somewhere between a 20- and 25-year loan term.

Despite having lower monthly payments on a 30-year mortgage, those who choose to go with a term rate that is less lengthy can save on interest in the long-term.

For example, on a 30-year mortgage, if a homeowner financed $300,000 on a new loan, at an interest rate of 3% over 30 years, the loan payment would be $1,265 per month, not including taxes or insurance. Over the course of those 30 years, if every payment was made, $155,000 would be paid in interest to the lender.

On the flip side, if a homeowner financed $300,000 on a new loan for 20 years, with an interest rate of about 2.75%, the monthly payment would be $1,626, which is $361 higher than the 30-year example.

However, in that scenario, a homeowner would pay $90,000 in interest, which is $65,000 less than it would be for a 30-year term.

A homeowner’s financial circumstances can go a long way toward determining if it’s best to save money on a monthly basis but pay a lot more in interest over the duration of the loan, or vice versa.

The good news for homebuyers is that there is a scenario in which they can have the best of both worlds.

What starts off as a 30-year term can be shortened.

“It’s all based on the amortization of the loan itself, so anything above and beyond the minimum payment goes towards the principal balance,” Graciak said. “There’s no prepayment penalty on mortgage loans, so you can pay off your loans as fast as you want. Just because you do a 30-year doesn’t mean you have to take 30 years to pay it off.”

Even those who have a goal of paying a home off in 15 years may choose to go with a 30-year term because of the flexibility it offers.

“There’s some people that can afford a 15-year accelerated plan, but they still opt for a 30 because they like that the minimum required payment would be as low as possible,” Halker said. “But they can always choose to make an accelerated, or a 15-year payment on a 30-year mortgage, and pay it off faster. But in times when they want a little extra cash flow for the month, they can have that smallest minimum payment that they have to make to the bank. So, different strategies dictate what type of a loan term that somebody might want.”

Halker shared an example of a client who could afford a 15-year mortgage but decided to go with a 30-year term after weighing his options.

“When we looked at the rates between the 15-year and the 30-year at that time, there was only 3/8 of a point difference between the 15- and the 30-year,” he said. “He opted to go with the 30-year because the interest wasn’t much (different), and he wanted to have some extra cash around the holidays. So he said, ‘I can have the lowest payment possible, but then after the holidays, I’ll go back to making a 15-year payment and I’ll be on track to pay this 30-year off in 15 years anyway. But when I want to have extra cash flow, the 30-year gives me the smallest payment possible.’”

When it comes to paying a loan off early, homeowners have different options.

One would be to make one extra mortgage payment per year, which would mean making 13 instead of 12.

Another option is to pay extra on mortgage payments every month.

Either one of those options results in the mortgage loan being paid off sooner.

“There’s no right or wrong way to do it,” Graciak said. “Paying extra, whether it’s monthly or just one time per year, it’s the same effect on the actual loan itself.”

According to debt.org, making one extra payment per year on a $200,000 loan at 2.75 % interest reduces the mortgage by three years and saves $12,000 in total interest.

An early mortgage payoff calculator can be found by visiting nerdwallet.com.

Regardless of the length of the loan term, an applicant’s credit, income and assets play a role in whether or not an application is approved. However, the term length someone is applying for can make a big difference in the process.

“Your debt-to-income ratio, so how much money you make, determines (the) mortgage payment you can qualify for,” Graciak said. “It’s easier to qualify for a 30-year monthly mortgage payment because that’s the lowest possible payment, versus a 15-year, (which) may be close to double what the payment is.”

How long someone expects to stay in a home can be a determining factor in deciding what the best term option is for them.

“Long-term goals, I would say, factor into how much they put down upfront, or their mortgage term,” Graciak said. “But I would say 90% of buyers are usually (going) with the 30-year mortgage term, just because there’s really not that much of a break in interest rate between the 15-year term and the 30-year term, so why handcuff yourself to a 15-year term when you could still make the 15-year payment monthly, even though you have a 30-year term.”

Despite 30-year terms being the most common, Halker said eight-, 10-, 12- and 15-year terms are popular for people who are “a little bit older,” because they don’t want to have mortgage payments after they’re retired.

He also added that, by doing so, “They’ve got a free and clear home to pass on” to their children.

In any of those scenarios, credit scores play a big role in determining whether or not someone is approved for a mortgage loan, and Arcadia’s owner, Mike Martin, offered some advice.

“Make sure that you shop a couple lenders,” Martin said. “Not all guidelines are the same with everybody. One lender might do loans only at (a) 625 (credit score) or better, whereas other lenders like us will help out with the lower credit scores and you don’t really have to do anything to fix anything up. So that’s a huge factor.”

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