When you take out a mortgage, you typically choose a loan term, such as 15, 20 or 30 years. This represents the length of time you have to repay the loan in full. The actual life span of your mortgage though; the time you actively spend on payment is often shorter than the loan term. The article thus examines what determines the lifespan of mortgages for readers so that they can know about how long it will take to pay off their home loans.
Loan Term vs Mortgage Lifespan: What’s the Difference?
The predetermined duration of your contract usually stands at either 15, 20 or 30 years which is known as its loan term. This is the longest period within which one has to fully pay back before penalties are attracted. Nonetheless, many borrowers do not keep their home loans until maturity. They might transfer houses by selling them off and buying others at new places or opt for an entirely different type of loans while maintaining constant payment or add extra amounts each month in order to clear them faster than expected.
The mortgage lifespan, on the other hand, refers to the actual time you spend making payments on your mortgage. It’s the period from the loan origination to the final payment, regardless of whether you reach the end of the original loan term.
Determinants of Mortgage Duration
There are various elements that can affect how long your mortgage lasts:
Reducing Principal: Making additional payments towards the main amount of your loan can greatly reduce the duration of your mortgage. By decreasing the main balance more quickly, you’ll end up paying less interest in total and finish paying off your loan earlier.
Switching to a New Loan: When you replace your current mortgage with a new one, often with a lower interest rate or different conditions, it can alter the duration of your mortgage. This is because the new loan might have a different term or schedule for repayment.
Sale of Property: If you sell your property before the loan term is complete, your mortgage is fully paid off, and the term ends.
Loss of Property: In unfortunate situations where borrowers are unable to make their mortgage payments, the lender might take over the property, cutting short the mortgage term.
Modification of Loan Terms: If facing financial difficulties, you might be able to adjust the terms of your loan, which could extend the term.
Average Duration of a Mortgage
Although the typical term for a mortgage is 25 years, the actual duration is usually much less. For instance, in Canada, the average duration of a mortgage is typically around 7-8 years. This is because many people sell or refinance their homes before the loan term is up.
Things to Think About When Selecting a Mortgage Term
When deciding on the term of your mortgage, it’s crucial to consider your financial objectives and situations. A shorter term means you’ll have higher monthly payments but will end up paying less interest overall. On the other hand, a longer term means lower monthly payments but could lead to paying more interest in the long run.
Also, take into account your chances of moving, your capacity to make additional payments, and the possibility of refinancing in the future.
It’s important to understand the difference between the term of the loan and the lifespan of your mortgage. While the loan term sets a maximum time for repayment, your mortgage lifespan can be significantly shorter due to various reasons like prepayment, refinancing, or selling the property. By making smart choices about your mortgage and actively managing your loan, you can improve your financial situation and achieve your goals of homeownership.
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