A Complete Guide To Short-Term Mortgages

Finding and choosing a home is a lengthy process filled with research and reflection. Finding and choosing a mortgage is no different.

Prospective home buyers are the experts in their own needs and aspirations. One of the most important parts of the home buying process is balancing these factors to determine which loan terms will help you achieve your financial goals. For some homeowners, the best option is a short-term mortgage.

What Is A Short-Term Mortgage?

Any home loan that matures in less than 10 years is typically considered a short-term mortgage. This definition varies by the lender, however, with some considering any maturity of less than 20 years to be a short-term mortgage and others making the cutoff at just 2 or 5 years.

Short-term mortgages typically come with lower interest rates but require higher monthly payments, as they are spread over a shorter period of time.

As opposed to other types of mortgages, which are often spread over 15 to 30 years, short-term mortgages allow homeowners to rapidly build equity in their property. This puts them on a faster track to gain full ownership of their new home.

But keep in mind, if you're looking for a short-term loan, the Rocket Mortgage^® YOURgage^® program offers fixed-rate loans with the options to pick any term starting as short as 8 years.

How Do Short-Term Mortgage Loans Work?

With any mortgage, homeowners make monthly payments. These payments cover the principal balance and interest on the loan, as well as other items, like taxes and insurance.

Short-term mortgages function the same way, but due to the significantly shorter loan term, homeowners can expect to pay more per month on their principal balance.

Here’s a chart breaking down repayment differences:

If you can afford to make the larger monthly payments, short-term mortgages can save you money over the life of the loan because these loans typically come with lower interest rates.

When lenders determine interest rates, they’re accounting for the inflation that’ll occur over the life of the loan. Because these loans will theoretically be paid off in the not-so-distant future, the lender doesn’t need to forecast as far, 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 who move forward with long-term mortgages.

If you’re unsure if you can afford the larger payments associated with short-term mortgages, we recommend calculating your mortgage payment before applying.

The Pros And Cons Of Short-Term Mortgages

As with anything, short-term mortgages come with various benefits and drawbacks. Consider your budget and needs when deciding on your ideal mortgage type.

The Pros Of Short-Term Mortgages

Here are some primary benefits of taking on 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 lower interest rates, 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 give you the option 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 equity in your home 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

The Cons Of Short-Term Mortgages

The following describes some of the primary drawbacks of taking on a short-term mortgage:

• Higher mortgage payments: Short-term mortgages require higher monthly payments than longer-term loans due to their shortened pay period.
• Not offered by many lenders: It can be difficult to find a mortgage lender that offers short-term mortgages. Because of their unique terms, they aren’t as popular as 15- or 30-year loan options and are awarded less frequently.

Shorter Vs. Longer Mortgage Terms: What’s The Difference?

You may think the contrast between these loans is obvious: One mortgage is short and the other is long. But the loan length is just one of several differences between short-term and long-term mortgages. When deciding on a mortgage term length, use the following sections as a guide:

Shorter Mortgage Term

Do you know where you’ll be in 15 years? How about in 30 years?

For most of us, the answer is probably no, and this is one of the biggest advantages of short-term mortgages. As opposed to long-term mortgages, which are typically spread over 15 to 30 years, short-term mortgages allow homeowners to pay off their loan in 10 years or less while paying significantly less in total interest along the way.

These lower interest payments, along with a shorter loan length, can easily lead to more financial freedom. However, short-term mortgages do come with the drawback of higher monthly payments to offset this.

Longer Mortgage Term

There’s a reason the 30-year mortgage is the most common in the U.S. Whether due to the larger loan amounts offered or the convenience of paying low monthly payments over a longer period, these loans come with obvious advantages.

Homeowners with long-term mortgages also have refinance options to pay it off early if they find themselves financially able to do so (but be aware that some lenders charge prepayment penalties).

With that said, these advantages also mean paying more in total interest over the life of the loan.

Whether you want to go the traditional route with a longer mortgage term or take advantage of paying less in interest with a shorter term, make sure the loan will fit your budget. It’s best to explore all of your options and see what types of terms you qualify for.

FAQ: Short-Term Mortgages

Here are some popular questions about short-term mortgages. As with any financial decision, it’s crucial to examine all angles before deciding how to move forward.

I have a long-term loan. Should I refinance to a shorter-term mortgage?

Current homeowners can choose to refinance their mortgage to get a better interest rate, cash in on their home’s equity or shorten the life of the loan. 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 due to the shortened loan length. To ensure you can afford these payments, calculate your home expenses and debt-to-income ratio (DTI) before applying.

How do I qualify for a short-term mortgage?

Just like traditional mortgage lenders, your short-term mortgage lender will review your credit score, credit history, income, DTI, assets and liabilities to determine whether you qualify for this mortgage type. To find out the specific requirements of your lender, you can apply for initial approval.

The Bottom Line: Consider Your Short-Term Mortgage Options

Short-term mortgages come with several advantages and disadvantages. For homeowners who can afford larger monthly payments, these loans offer favorable interest rates and can considerably decrease the time it takes to pay off your home.

Interested in a short-term home loan? Rocket Mortgage has options as short as 8 years. Start your application today to find the best loan for you.