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A 30-year mortgage can offer stability and low monthly payments – but this convenience comes with a price. You’ll pay thousands of dollars more in interest over the life of your mortgage, and to be eligible for a 30-year amortization period, you’ll need to put at least 20% down on your new home, as insured mortgages cannot exceed amortization periods of 25-years.
The biggest difference between a 30-year mortgage and shorter amortization periods – like 25- or 15- years – is the amount of interest you’ll pay over the life of the mortgage. Depending on your interest rate, you could end up paying close to your initial principal in interest alone.
On a 30-year $200,000 mortgage at a 3% APR, you might pay a low payment of roughly $841.21 per month. But your total interest paid by the end of the mortgage would be approximately $102,833.90.
The same mortgage amount and interest rate on a 15-year amortization period would result in a total of approximately $48,287.82 interest, but with higher monthly payments of $1,379.38.
Mortgage term | Monthly Payment | Total Interest Paid | Savings |
---|---|---|---|
10 years | $1,929.50 | $31,540.01 | $16,747.81 |
15 years | $1,379.38 | $48,287.82 | $17,472.80 |
20 years | $1,107.34 | $65,760.62 | $18,186.68 |
25 years | $946.49 | $83,947.30 | $18,886.60 |
30 years | $841.21 | $102,833.90 | $19,569.88 |
35 years | $767.63 | $122,403.78 | – |
From
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A 30-year mortgage offers a few useful benefits for homeowners, including:
Despite their ability to free-up your cash flow, 30-year mortgages come with a few pitfalls:
The lower monthly payments of a 30-year mortgage offer flexibility with your income and cashflow — an asset if big life changes are on the horizon. Down the road, you’ll have the option to refinance to shorter terms if you can afford larger monthly payments.
That said, if you can avoid the high interest on a 30-year mortgage, it could save you thousands of dollars in the long run. If you can comfortably pay your mortgage and living expenses – and want to quickly build equity in your home – you may want to consider a shorter amortization period of 10-, 15- 20-, or 25-years.
Variable rate mortgages come with fluctuating interest rates that are not fixed for the mortgage term. A variable rate is typically expressed as the prime rate + or – a number. The prime rate can change based on the economy and is determined by the Bank of Canada’s overnight rate. While you might wonder why anyone would want to risk rising interest rates, a variable rate is usually fairly lower than a fixed-rate, especially for the first few years that you pay your mortgage. Over the life of the mortgage, a variable rate can save you a fair amount of money – if the prime rate stays competitive for the long run.
For a more detailed explanation of variable rate mortgages, check out our guide here.
A fixed interest rate, on the other hand, will stay fixed for the term – whether that’s as low as 6 months or as high as 10 years. Once your term ends, you can refinance with the same lender or switch to another lender. A fixed-rate usually starts out higher than a variable rate, but may end up lower than the variable rate within a few years, again depending on the prime rate.
Learn more about fixed-rate mortgages here.
Which makes for the better choice depends on if you prefer knowing how much you’ll pay each month or whether you’re willing to take a risk on the prime rate staying low and competitive. What could be a better choice might be taking out a convertible mortgage, which allows you to reap the benefits of a low variable-rate for a few years and then switch to a fixed-rate mortgage once the prime rate rises. Another choice would be a hybrid or combination mortgage, which is usually a 50/50 combination of both a fixed-rate and a variable rate mortgage.
Most banks, credit unions and online lenders offer 30-year amortization periods. Keep in mind you’ll need to pay at least a 20% down payment on your home in order to be eligible for an amortization period of more than 25-years.
When it comes to flexibility and stability, a 30-year mortgage could be the answer. Low monthly payments can help you plan your financial future – but it comes at the high price of paying thousands of dollars more in interest.
If you don’t plan on living in the house for 30 years or you don’t like the idea of paying more interest over the life of the mortgage, compare shorter amortization periods to find one that better suits your needs.
A complete guide to US mortgages for Canadian citizens.
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