A Complete Guide To Short-Term Mortgages
February 02, 2024 5-minute read
Author: Melissa Brock
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’re 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 puts them on the fast-track to gain full ownership of their home. The Rocket Mortgage® YOURgage program offers fixed-rate loans with the options to pick any term starting as short as 8 years.
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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’re 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 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. When considering mortgage terms, potential homeowners must consider their personal budget and needs in order 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 improvements 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 mortgage 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-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 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 short-term mortgages. As opposed to long-term mortgages, which are typically spread out 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. 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 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 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 total 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.
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, you’ll want to make sure the loan will fit your budget. The best thing you can do is to explore your options and see what types of terms you qualify for.
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 shorter-term 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.
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.
How do I qualify for a short-term mortgage?
Just like traditional mortgage lenders, your short-term mortgage lender will take a look at your credit score, credit history, income, debt-to-income ratio, assets and liabilities to determine whether you qualify for this mortgage type.
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 can cut the time it takes to pay off your home by half or sometimes more.
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.
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