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A Complete Guide To Short-Term Mortgages

Katie Ziraldo5-minute read

July 01, 2021

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

As the prospective home buyer, you are the expert in your own needs and aspirations, and one of the most important parts of the home buying process is balancing these things to determine which loan terms will help you achieve your financial goals. One of these options is a short-term mortgage.

What Is A Short-Term Mortgage?

Any home loan that matures in less than 10 years is considered a short-term mortgage. 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 and gain full ownership of their home.

Great news! Rates are still low in 2021.

Missed your chance for historically low mortgage rates in 2020? Act now!

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 things 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.

Still, if you can afford to make the larger monthly payments, short-term mortgages can save you money over the lifecycle of the loan. This is because these loans come with lower interest rates. When lenders determine interest rates, they are accounting for the inflation that will 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 borrowers can enjoy lower interest payments. Because there are also less monthly payments overall, these homeowners will pay significantly less in interest than those who move forward with long-term mortgages.

If you’re not sure if you can afford the larger payments associated with short-term mortgages, we recommend calculating your mortgage payment before signing.

The Pros And Cons Of Short-Term Mortgages

As with anything, short-term mortgages come with various benefits and drawbacks. When considering mortgage terms, potential homeowners must consider their personal budget and needs to set themselves up for success.

The Pros Of Short-Term Mortgages

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

  • Pay less interest: Compared to a 15-year or 30-year mortgage, short-term mortgages offer lower interest rates, saving you money over the lifespan of the loan.
  • Own your home sooner: Making payments for a shorter amount of time allows homeowners who take this path to own their home sooner, which may allow you to put money toward other financial goals, such as purchasing an investment property.
  • Build equity faster: Paying down the loan’s principal balance faster can build more equity in your home – and increasing home equity can be beneficial to homeowners in many ways, as it can be accessed and used for things like home improvement and consolidating debt.

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 that of longer-term loans due to their shortened pay period.
  • Not offered by many lenders: It can be difficult to find a loan lender that offers short- term mortgages due to their unique terms.

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- and long-term mortgages. When deciding on a mortgage term length, use the following sections as a guide.

Shorter Mortgage

Do you know where you’ll be 15 years from now? How about 30 years from now? For most of us the answer is probably no, and this is one of the biggest advantages of shorter-term mortgages. As opposed to long-term mortgages, which are typically spread out over 15 – 30 years, short-term mortgages allow homeowners to pay off their loan in 10 years or less while paying significantly less in interest along the way.

These lower interest payments, along with a shorter loan length, can easily lead to more financial freedom. But when it comes to shorter mortgages, homeowners must weigh the benefit of interest savings with the drawback of higher monthly payments to determine what’s right for them.

Longer Mortgage

There’s a reason the 30-year mortgage is the most common in the U.S. Whether due to the larger loan amount offered or the convenience of paying low monthly payments over a longer period of time, there are obvious advantages to these loans. Homeowners with long-term mortgages also have refinance options to pay it off early if they find themselves in the financial situation to do so.

However, these advantages also mean paying more in interest over the life of the loan. With longer mortgages, homeowners must weigh the benefit of low monthly payments with the drawback of a long-term commitment that also means paying more in interest.

FAQ: Short-Term Mortgages

There are a handful of popular questions asked 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 Short -erm Mortgage?

Current homeowners can choose to refinance their mortgage to get a better interest rate or cash in on their home’s equity. Refinancing can also mean shortening the length of the loan, allowing you to own your home sooner.

But when considering a refinance, it’s important to ensure the new mortgage terms would be an improvement from your current rates and terms. To do this, we recommend consulting this guide to determine whether a shorter-term loan will work for you.

How Can I Determine Whether I Can Afford A Short-Term Mortgage?

As discussed, short-term mortgages require higher monthly payments due to the shortened loan length. To ensure you can afford these payments, prospective home buyers should calculate their monthly home expenses before applying. When in doubt, calculating your debt-to-income ratio can help you determine how affordable your future payments will be.

Those considering a short-term mortgage can also consult this guide, as the tips it offers can also apply to shorter term mortgages.

The Bottom Line: Consider Your Short-Term Mortgage Options

Short-term mortgages come with several advantages and disadvantages, but for homeowners who can afford larger monthly payments, these loans offer favorable interest rates and cut the time it takes to pay off your home by half or sometimes more.

If you’re looking to purchase a home and believe a short-term mortgage is right for you, we recommend applying for a YOURgage® loan, which comes with flexible loan terms ranging from 8 – 29 years in length.

If you already have a long-term mortgage – don’t fret! Refinancing can be a great way to take advantage of shorter-term loans. Review your refinance options today and lock in your rate by applying online with Rocket Mortgage®.

Low rates were a big story in 2020. It was a great year to refinance!

Great news about 2021 so far: Rates are still relatively low.

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Katie Ziraldo

Katie Ziraldo is a writer focused on financial learning for current and future homeowners. She found her love of writing through her experience working with various newspapers, such as the Detroit Free Press. Her financial literacy stems from her four years as a Recruiter, when she learned the details of every role in the mortgage process. As a writer, she uses that knowledge to create relevant content for homeowners to help them reach their goals.