Term limits: They're important for loans too

One of the most common questions I receive as a Mortgage Loan Originator at the New Hampshire Community Loan Fund is whether a borrower should amortize his or her loan at the full 25-year maximum, or perhaps go for a shorter loan term.

At first glance the answer might seem obvious a shorter loan term will pay the loan off sooner and save the borrower thousands of dollars in interest over the life of a loan. Sure, your mortgage payment will be higher but it will be well worth it in the end ... right?

I often answer the question with a personal story. In 1998, I purchased a home with a 30-year, fixed-rate loan. Several years later I decided to refinance, dropping the term to 15 years. Although my mortgage payment went up several hundred dollars a month, I was happy knowing that my diligence would pay off (no pun intended) sooner.

Then the economy dipped into recession. I lost my job. Unemployment compensation was just a fraction of what I had been making and I could not refinance the loan back to 30 years because I wasn't working. Luckily, I found a new job before the money ran out. If I had not, I might have been in real trouble.

So what's the moral of the story? The great thing about most home loans (including our Welcome Home Loans) is that you can put extra money toward principal at any time without paying a penalty. You can still pay off the loan earlier and save the money that would have gone toward interest, but you aren't shackled by the higher payment.

When times are good, put extra money toward paying off the loan. When they aren't so good, you'll have a more-affordable monthly payment. Of course, each borrower has to decide for himself or herself which way to go, but for me, it was a valuable lesson learned.

Ron Thompson is a Welcome Home Loans Mortgage Loan Originator at the Community Loan Fund.

NMLS #225348. Licensed by the New Hampshire Banking Department.