Short-Term Mortgages: A Helpful Guide

Most mortgages in the United States have a repayment term of 30 years, but you can pay off a home loan in less time. Short-term mortgage loans are repaid in 15 years or less. They have a higher monthly payment, but you can own your home free and clear sooner while saving thousands in interest. There are pros and cons to short-term mortgages, so it’s important to know the trade-offs before signing up for one.

Key Takeaways:

What Is A Short-Term Mortgage?

A short-term mortgage has a term of 15 years or less. Short-term loans are popular with buyers who want to build equity quickly and own their home sooner, as well as with homeowners who wish to refinance without extending their term.

Because a short-term loan is paid off in less time, lenders typically charge a lower interest rate – up to one percentage point – than for a 30-year mortgage. And since there are fewer payments to make, you’ll pay less overall interest on the loan, ultimately saving you money. The trade-off is that your monthly payment will be higher, which not everyone can afford.

“A short-term mortgage isn’t just a loan – it’s a strategic financial maneuver designed to sprint towards homeownership,” says Greg Clement, Founder and CEO of Realeflow, a real estate investing software company based in Parma Heights, Ohio. “Typically lasting between five to 15 years, it’s crafted for those who aim to pay off their homes quickly and efficiently.”

What’s Your Goal?

Home Purchase

Home Refinance

Tap Into Equity

How Do Short-Term Mortgages Work?

With a short-term mortgage, you’ll make monthly payments toward the principal borrowed, the interest charged by the lender, and other costs like property taxes and homeowners insurance. But because you’re paying off the loan in less time, you’ll pay more each month.

One of the most appealing things about a short-term mortgage is that it saves you money in the long run. Because you’ll pay less interest over the life of the loan, thanks in part to lower interest rates, the overall cost of paying off your home will be less. In contrast, a longer-term mortgage has a lower monthly payment, but you pay more overall interest.

For example, say you’re purchasing a $500,000 home and could afford a 20% down payment. A 30-year fixed-rate mortgage at 7% would cost $2,661 a month, and you’d pay $558,036 in total interest. A 10-year short-term mortgage for the same amount at 6% would have a monthly payment of $4,441 and total interest of $132,898. The short-term option would cost $1,780 more per month, but 20 additional years of the lower payment means you pay $425,138 more in interest – more than three times as much – with the longer term.

How Do I Qualify For A Short-Term Mortgage?

To qualify for a short-term mortgage, lenders generally have the same requirements as they would for any mortgage:

Because the monthly payment for a shorter-term mortgage is higher, lenders typically have stricter requirements to ensure you can afford the payments.

You also need money for the down payment and closing costs. On a conventional loan, the minimum down payment is 3% of the purchase price. A down payment of 20% or more will allow you to avoid paying for private mortgage insurance.

What Are The Pros And Cons Of Short-Term Mortgages?

Many aspects of short-term mortgages may be appealing, but there are potential downsides.

Pros

Benefits of a short-term mortgage include:

Cons

Potentially negative consequences of short-term mortgages include:

Alternatives To Short-Term Mortgages

If you can’t afford the monthly payment on a short-term mortgage, here are some other options for buying a home.

Adjustable-Rate Mortgages

Adjustable-rate mortgages are home loans whose interest rate changes over time. They usually start with a lower rate that’s locked in for a specific time, then adjust it depending on market conditions. Buyers can use an ARM like a short-term mortgage should they plan to sell the home before the introductory rate expires. That allows them to save on interest while they own the home and sell the home before it can increase.

Interest-Only Mortgages

Interest-only mortgages are the opposite of short-term mortgages, in which monthly payments are high and you build equity quickly. Payments on an interest-only mortgage are not applied to the principal for the first several years of the loan, reducing the monthly payment. You won’t earn equity in those years unless the value of your home increases. And if your home loses value, you could end up with negative equity, where you owe more than your home is worth. Buyers who plan on owning a home for a short period or converting it into an investment property often use these loans.

Bridge Loans

Bridge loans are meant to provide short-term cash between two points. “As the name implies, these loans are meant to ‘bridge’ the financial gap between purchasing a new property and selling your previous one,” says Croak. These loans typically have terms of six months to a year. They usually have higher interest rates than conventional loans.

Balloon Loans

Balloon loan payments are amortized so that the entire balance is not paid at the end of the payment schedule. That unpaid amount then must be paid in a lump sum. This allows you to reduce the monthly payment, but you’ll need to be able to make the balloon payment or risk defaulting on the loan. Balloon loans are popular with buyers planning to live in a house for a short time or flip a property because their profits from selling the home should allow them to avoid the balloon payment.

FAQ

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

The Bottom Line

Short-term mortgages are a fast path to owning your home. They also can save you thousands in interest and quickly build equity. However, they also come with higher monthly payments that home buyers need to be sure they can afford before choosing this loan option.

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