The best mortgage length is different from person to person. A long-term fixed rate mortgage may offer peace of mind and security to one person, but trap another in a choice between turning down a non-local job opportunity or early payment penalties. When determining the best mortgage length for you, you should take into account the stability of your finances, your family situation, your expectations of future interest rates, and your tolerance for risk.
Financial stability
With a stable, secure job, you may wish to lock in your mortgage over the full 25- or 30-year amortized period. This will guarantee that your mortgage payments will never go up. Mortgage payments over longer amortized terms are lower, but you will pay much more in interest.
If you expect to move or receive a major payout within 5 years of less, you will have to weigh interest rate benefits against early payment or closure penalties, which can often be prohibitive. In this case, a 5-year or even 1-year mortgage term may be appropriate.
Some types of mortgages allow double-up payments. Choose this option if you have few other expenses, or if you can reasonably expect occasional bumps in income due to bonuses or raises. Doubling up even just once a year will drastically cut down on the total interest you pay, because unlike standard mortgage payments, any extra payments are applied directly to the principal.
If possible, tie your mortgage payments directly to your pay period. Over the life of the mortgage, you can save a great deal of interest simply by making biweekly or weekly payments instead of monthly payments.
Taking the same idea one step further, some lenders now offer an all-in-one mortgage/checking account/home equity line of credit. The advantage of this kind of mortgage is that every cent deposited into your account goes immediately towards your debt, which can result in your mortgage being paid off years early. However, interest rates may be higher than other options and are usually compounded monthly rather than annually.
Family situation
A young family just starting out will have different mortgage needs than a couple nearing retirement. Families with young children may wish to consider a 15-year mortgage, which allows parents the freedom to choose a lifestyle change after children go to college or move away from home. A shorter 1- or 5-year mortgage term may be more appropriate for those who expect to receive a large severance or early retirement package in the near future.
Future interest rates and tolerance for risk
Barring another serious financial collapse, it will be difficult for interest rates to go much lower than they already are. However, small adjustments in interest rates are likely even over a 5-year mortgage term, while interest rates are certain to rise by the middle of a 25-year mortgage term. Depending on your personal tolerance for risk, these considerations may encourage you to remain flexible in a variable rate 5-year mortgage or to lock in a slightly higher interest rate for a much longer term.