The Complete Guide to Short Term Home Loans

Short term home loans can be a great option for some homebuyers With their faster payoff time and potential interest savings, these loans allow borrowers to own their home free and clear more quickly. However, short term loans also come with larger monthly payments that not all buyers can afford This guide will explain everything you need to know about short term mortgages.

What Are Short Term Home Loans?

Short term home loans, also called short term mortgages, are loans with a payoff period of less than 15 years. Most home loans in the U.S. have 30 year terms, but borrowers who want to pay their mortgage off faster may opt for a short term loan.

The definition of a short term mortgage varies by lender. Some consider any loan under 20 years to be short term, while others use 10 years or less as the cutoff. The shortest terms available are often 5, 7, or 10 years.

With their accelerated payoff time, short term loans require higher monthly payments But they also come with lower interest rates, saving borrowers money over the life of the loan

How Do Short Term Home Loans Work?

Short term mortgages work much like other home loans. Each month, part of your payment goes toward interest and part pays down the principal balance. This builds equity in your home over time.

The difference is short term loans condense payments into a shorter timeframe. So instead of making 360 payments over 30 years, you may make just 120 payments over 10 years.

Here’s an example to illustrate:

• Loan amount: $300,000
• Interest rate on 30-year loan: 6.5%
• Interest rate on 10-year loan: 6%
• Monthly payment on 30-year loan: $1,896
• Monthly payment on 10-year loan: $3,407
• Total interest paid on 30-year loan: $682,633
• Total interest paid on 10-year loan: $132,898

As you can see, the monthly payment is higher with a short term loan. But you save significantly on interest costs over the life of the loan.

The Pros and Cons of Short Term Home Loans

Shorter loan terms come with unique advantages and disadvantages. Consider these when deciding if a short term mortgage fits your needs:

Pros

• Pay off your mortgage faster
• Build home equity more quickly
• Own your home free and clear sooner
• Pay less interest over the loan term
• Lower interest rates than longer term loans
• Free up money sooner for other goals

Cons

• Higher monthly payments
• May not qualify for as large of a loan
• Tougher to meet lender requirements
• Less loan term flexibility
• Limited availability from lenders

Who Should Consider a Short Term Home Loan?

Certain borrowers stand to benefit most from short term mortgages:

• Homebuyers who can afford the higher monthly payments
• Those wanting to build substantial equity within 5-10 years
• Borrowers nearing retirement age
• Those who plan to move or sell again within 5-10 years
• Investors flipping homes or using rental property mortgages
• Owners wanting to pay off their mortgage sooner

Short term loans allow these borrowers to own their home free and clear more quickly. Just be sure you can afford the larger monthly payment before committing.

Short Term Loan Requirements and Qualification

To qualify for a short term home loan, you’ll need:

• A minimum credit score of 620 or higher
• Low debt-to-income ratio (ideally below 43%)
• 20% down payment for the best rates and terms
• 2 years of employment history
• Solid income and assets

Mortgage lenders want to ensure borrowers can afford the higher payments associated with short term loans. You’ll go through similar underwriting steps as any other mortgage, including documenting income, assets, debts, and credit history.

How to Find the Best Short Term Home Loan Lender

Not all mortgage lenders offer short term loans. Here are some tips for finding the right lender:

• Check credit unions, online lenders, and non-bank mortgage companies
• Ask friends, family, or your real estate agent for referrals
• Search for lenders advertising short term mortgages
• Compare interest rates and fees from multiple lenders
• Look for flexible terms like 7, 10 or 12 years
• Apply with multiple lenders to increase your chances

Getting loan estimates from several lenders can help you find the best rates and overall value. You want a lender offering competitive pricing and flexible short term options.

Alternatives to Short Term Home Loans

If short term loans don’t fit your budget, here are a few other options:

• Adjustable Rate Mortgages – Offer lower initial rates with payments that fluctuate over time. Good for those planning to move again soon.

• Interest-Only Mortgages – Only pay interest in the first years, with payments jumping later once principal repayment starts. Help reduce initial monthly costs.

• FHA Loans – Require lower down payments and credit scores, making qualification easier. A good choice if you don’t qualify for a typical short term loan.

• VA and USDA Loans – Offer zero down payment options and looser credit standards for eligible borrowers. Useful if you have limited funds saved.

• Extended Loan Terms – Go with a longer term like 15 or 30 years to benefit from smaller monthly payments, then refinance later or pay extra each month to pay off your mortgage faster. This creates flexibility in case your finances change down the road.

The Bottom Line on Short Term Home Loans

In the end, short term mortgages allow qualified buyers to pay off their home faster and build equity more quickly. Just be sure you can afford the larger monthly payments and accelerated payoff schedule. Shop with multiple lenders to find your best option. With the right short term loan, you could shave years off your path to mortgage payoff.