A complete guide to short-term mortgages

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Your loan term is how long you have to repay your mortgage – and it affects your interest rate, monthly payment, and the total interest you’ll pay. Short-term mortgage loans can reduce how much you pay in lifetime interest, but they come with higher monthly payments. Below, we define short-term mortgages, compare short-term vs. long-term loan options, walk through a real payment example, and help you decide what fits your budget and goals.

What is a short-term mortgage?

A home loan that matures in less than 15 years is typically considered a short-term mortgage. This definition can vary by lender. Some lenders consider a short-term home loan to be a mortgage that matures in 10 years or less, while others draw the line at 2 or 5 years.

Regardless of the loan term, short-term mortgages typically have lower interest rates. They also require higher monthly payments because you’re repaying the loan over a shorter period. Even though you’ll be paying more each month, you’ll pay less interest overall with a short-term loan.

If you can afford the higher monthly payments, you’ll be rewarded with the ability to build home equity more rapidly than you would with a long-term loan. This puts you on a faster track to gain full ownership of your home.

The most common type of short-term mortgage is a 15-year mortgage, but customizable loan terms are available.

If you're looking for a short-term loan, the Rocket Mortgage YOURgage program offers fixed-rate loans with terms as short as 8 years.

Short-term vs. long-term mortgage: What’s the difference?

The main difference is that shorter-term mortgages typically last 10 – 15 years, while longer-term mortgages last 20 – 30 years. The 30-year fixed-rate mortgage is the most common overall.

However, that’s not the only difference. Choosing between a short-term or long-term mortgage affects how much you pay in interest each month and in total – and how quickly you build equity. Here’s a quick breakdown of the main differences:

Short-term mortgage example

Here’s how term length changes your payment and total interest on the same home price.

Suppose you take out a mortgage to buy a $350,000 home and are deciding between a 10-year and a 30-year loan term. The lender offers you a 6% interest rate on the 10-year loan and a 6.5% interest rate on the 30-year term. Here's what your monthly payments would look like with a 10% down payment, and how much your loan would cost in both scenarios:

If you can afford the monthly payment, short-term mortgages save you money over the life of the loan because these loans typically come with a lower interest rate. In this example, your monthly payment would be $1,380 higher with the 10-year mortgage term, but you’d pay almost four times as much interest over the life of the 30-year loan term.

When lenders determine mortgage interest rates, they're accounting for the inflation that'll occur over the life of the loan. Because these loans are scheduled to be paid off in the not-so-distant future, the lender doesn't need to forecast as far ahead, and the borrower can enjoy lower interest payments.

And since there are also fewer monthly payments overall, these homeowners will pay significantly less in interest than those with long-term mortgages.

If you’re unsure that you can afford the larger payments associated with a short-term mortgage, we recommend using the mortgage calculator from Rocket Mortgage before applying.

The pros and cons of short-term mortgages

The trade-off of a short-term mortgage is that you pay more each month to save substantially on lifetime interest and build equity faster.

Pros

Here are some benefits of choosing a short-term mortgage:

• Pay less interest. Compared with a 15-year or 30-year mortgage with higher interest rates, the best short-term mortgages offer a lower interest rate, saving you money over the life of the loan.
• Own your home sooner. Making payments for a shorter time allows you to own your home sooner. This may allow you to put money toward other financial goals, such as purchasing an investment property or buying a vacation home in addition to your current home.
• Build equity faster. Paying down the loan’s principal balance faster can build home equity more quickly, and increasing home equity can benefit homeowners in many ways. For example, a home equity loan can be used to make home improvements or to consolidate debt.

Cons

There are downsides to short-term mortgages, so be on the lookout for the following:

• Higher mortgage payment. Short-term mortgages require higher monthly payments than longer-term loans due to their shorter repayment schedules.
• Not offered by as many lenders. It can be difficult to find a mortgage lender that offers short-term mortgages. Because of their unique terms, they're less common than 15- or 30-year loan options.
• Strict eligibility requirements. Lenders typically have stricter eligibility criteria to ensure you can afford the higher monthly payments.
• It may limit how much you can borrow. You may not be able to afford a pricier home with a short-term loan because of the higher payments.

FAQ

Here are answers to common questions about short-term mortgages.

Should I refinance a long-term loan to a shorter-term loan?

Current homeowners can choose to refinance their mortgage to get a better interest rate, borrow their home's equity, or shorten the loan term. But when considering a refinance, it's important to ensure the new mortgage terms would improve your current rates and terms. And don't forget, you'll also need to pay closing costs on your new home loan.

Can I get a short-term mortgage?

Short-term mortgages require higher monthly payments because of their shorter loan terms. As a result, borrowers need a higher income to afford this loan term. Even if you're approved for a short-term mortgage, it's important to make sure you can keep up with the payments.

How do I qualify for a short-term mortgage?

Like traditional mortgage lenders, your short-term mortgage lender will review your credit score, credit history, income, debt-to-income ratio (DTI), assets, and liabilities to determine whether you qualify for this mortgage type. To determine your lender's specific requirements, you can apply for initial approval.

How do I know if I can afford a short-term mortgage loan?

To determine if you can afford a short-term mortgage, you can use the mortgage calculator from Rocket Mortgage to see how your interest rate, loan amount, and loan term will affect your monthly payment. Be sure to also consider homeowners insurance, property taxes, and the ongoing costs of homeownership, like maintenance and repairs. A common guideline is to ensure that your mortgage payment doesn't exceed 28% of your gross income and that your total debt doesn't exceed 36% of your income.

The bottom line: A short-term mortgage offers huge savings in interest

Short-term mortgages offer an attractive path to homeownership for borrowers who can afford higher monthly payments. The long-term savings in interest can be significant. However, the right mortgage term ultimately depends on your income, financial goals, and how quickly you want to own your home outright. Carefully weigh the trade-offs to make an informed borrowing decision.

When you’re ready to take the next step, apply for a home loan with Rocket Mortgage and explore loan terms that fit your unique financial situation.