Term (Loan Term)
The loan term is the length of time a borrower has to repay a mortgage in full. It is expressed in years, with 30-year and 15-year terms being the most common in residential lending. The term directly affects the monthly payment amount, total interest paid, and the pace of equity accumulation.
What This Means
Common Loan Terms
Residential mortgages are most commonly issued with 30-year or 15-year terms, though 10-year, 20-year, and 25-year options are also available from many lenders.
- 30-year term - Lowest monthly payment among standard options; highest total interest cost. The most popular choice for homebuyers, accounting for approximately 90% of new originations.
- 15-year term - Significantly higher monthly payment, but substantially less total interest and faster equity growth. Lenders typically offer lower interest rates on 15-year terms compared to 30-year terms.
- Adjustable-rate mortgages (ARMs) - Often structured with terms like 5/6 or 7/6, where the first number is the fixed-rate period in years and the second is the adjustment frequency in months. The total term is typically 30 years.
How Term Affects Total Cost
A shorter term means higher monthly payments but dramatically reduces total interest. On a $300,000 loan at 7%, a 30-year term results in total interest of approximately $418,527, while a 15-year term at 6.5% results in approximately $170,469. The difference in total cost can exceed $200,000 on the same loan amount.
Choosing the Right Term
The appropriate term depends on the borrower's monthly budget, financial goals, and time horizon. A longer term preserves cash flow flexibility, which may be valuable for borrowers with variable income or other investment priorities. A shorter term builds wealth faster through accelerated equity growth and reduced interest expense. Some borrowers select a 30-year term for payment flexibility but make extra principal payments to effectively shorten the repayment period without being locked into higher required payments.