What Does Loan Maturity Mean?

Loan maturity is a technical way to express loan length. A loan matures at the date it is due to be paid off. Most mortgages mature between 7 and 30 years, with the 30 year mortgage being the most popular. If you fail to pay off a loan by its maturity date, then your loan will enter default. On the other hand, if you pay off your loan prior to maturity, you are considered to be breaking a loan contract. It is important to know the maturity of your mortgage so you can effectively make payments and build equity.

Defaulting on a Mortgage

Defaulting on a mortgage can happen at any point during the loan if you fail to make payments. Your mortgage contract will give terms for default. For example, if you miss three or more payments, your mortgage may move into default. Other lenders may have more flexible terms. Even if you make every single one of your payments on time, failing to pay enough toward the principal sum can mean you have a large amount remaining to repay the loan upon its maturity. A mortgage lender will rarely calculate your monthly payments so there is zero balance on the loan left at maturity. There will be a minimum payment, but you will have some choice in how much you pay each month. If you fail to pay enough, you may have a large sum left at maturity. You will have to pay this off all at once to close the loan and be debt-free on your home. 

Prepaying a Mortgage

If you pay too much each month, which many borrowers do, you may actually pay off your mortgage before it matures. Many first-time borrowers think this is a good thing. In fact, there are few loans that reward you for prepaying. A mortgage lender sets your loan amounts based on a given interest. This interest is assessed over time, not all at once, so you will end up paying more the longer your loan is alive. When you prepay, you reduce some of the interest payments the lender would have received. The lender will assess a fee for prepayment disguised as a "prepayment quote" that actually makes your loan more expensive to pay than if you simply paid it at its maturity date.

How Maturity Affects Rates

Electing a shorter maturity on your mortgage typically reduces your interest rate. Over time, a mortgage company needs to assess more interest to compensate for inflation and negate some risks associated with long loans. As a result, a loan that matures in 30 years will be more expensive than a loan that matures in 7. However, the loan maturing in 7 years will require much higher monthly payments. You should aim to balance monthly payments with maturity, ensuring you can keep you loan from default but still opting for the shortest loan possible. This balance can be hard to achieve. Most borrowers will opt for the longer loan then perhaps refinance to a shorter maturity if they find they can pay the loan off quicker.

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