Short term mortgage loans allow borrowers to pay off their home loan in less than the traditional 15 or 30 year timeframe. These loans typically have higher monthly payments but lower interest rates overall. In this comprehensive guide, we will explain everything you need to know about short term mortgages.
What is a Short Term Mortgage Loan?
A short term mortgage loan is simply a home loan with a shorter repayment term than the standard 15 or 30 year mortgage While the most common mortgage terms are 15 and 30 years, short term mortgages are usually structured as 10 years or less Some key things to know
- Short term mortgages require borrowers to pay more per month, since the loan principal is paid off faster
- Interest rates are typically lower than longer term loans
- Borrowers build equity and fully own their home much quicker
Short term mortgage loans can be structured as fixed or adjustable rate. With a fixed rate short term mortgage, the interest rate stays the same for the life of the loan. Adjustable rate mortgages (ARMs) have interest rates that fluctuate after an initial fixed period.
The Pros and Cons of Short Term Mortgage Loans
Shorter mortgage terms have advantages and disadvantages depending on your financial situation Let’s look at the key pros and cons
Pros
- Lower interest rates – Shorter terms often have lower rates, saving money over the life of the loan
- Build equity faster – More of your payment goes to principal, building home equity quicker
- Own your home sooner – The loan is completely paid off in less than 15 years
- Lower lifetime interest costs – Less interest is paid in total due to the shorter term
Cons
- Higher monthly payments – Payments are larger because the loan is paid off faster
- Difficult to qualify – Short term loans often have stricter credit and income requirements
- Prepayment penalties – Some lenders charge fees for paying off the loan early
- Limited availability – Not all lenders offer short term mortgage products
How Do I Qualify for a Short Term Mortgage?
Qualifying for a short term mortgage loan is similar to getting approved for a longer term loan. Here are some key factors lenders consider:
- Credit score – Most lenders require a minimum score of 620 or higher
- Debt-to-income ratio – Your total monthly debt payments vs income. Often capped at 43% or less
- Down payment amount – Short term loans generally require at least 20% down
- Income history – Multiple years of stable income sources preferred
- Assets and reserves – Money left over after closing for emergencies
Meeting these requirements indicates you can afford the higher monthly payments of a short term mortgage. Shop lenders to compare mortgage rates and terms you qualify for.
How Much Will My Payments Be?
Your exact monthly mortgage payment depends on the loan amount, interest rate, taxes, insurance and loan term. Generally, shorter term loans require larger monthly payments.
For example, let’s assume a $300,000 mortgage amount and 4% interest rate:
- 10 year term: $2,978 monthly payment
- 20 year term: $2,147 monthly payment
- 30 year term: $1,686 monthly payment
Use an online mortgage calculator to estimate payments for different loan terms. Be sure the larger monthly payments fit your budget.
Should I Refinance into a Short Term Mortgage?
If you currently have a long term mortgage, refinancing to a shorter term loan can make sense in certain situations. Reasons to consider refinancing to a short term mortgage include:
- Your home has gained substantial equity
- You want to pay off your mortgage faster
- Interest rates have dropped significantly since you obtained your current loan
- You now have the income to afford higher monthly payments
- Your goal is to eliminate PMI (private mortgage insurance)
Crunch the numbers to see if the costs of refinancing are justified by interest rate savings and a shorter loan term. Keep in mind prepayment penalties may apply if you refinance too soon.
How Do I Find the Best Short Term Mortgage Lender?
The first step is checking online lender reviews and complaints with the Consumer Financial Protection Bureau (CFPB) and Better Business Bureau. Avoid lenders with a pattern of customer issues.
Next, get mortgage rate quotes from multiple lenders. Compare:
- Interest rates for your credit score
- Allowed loan terms (5 year, 7 year, 10 year, etc)
- Types of loans offered (fixed, ARM, FHA, VA, USDA)
- Fees and closing costs
A mortgage broker can also help you identify reputable lenders offering competitive short term mortgage loans.
Should I Choose an Adjustable Rate Mortgage?
Adjustable rate mortgages (ARMs) are a type of short term loan with fluctuating interest rates. Your rate stays fixed for a period such as 5 or 7 years then adjusts periodically.
ARM pros:
- Lower initial rates than fixed rate mortgages
- Payments remain low if rates stay low
- Good option if you plan to move before the adjustment period
ARM cons:
- Monthly payments can increase substantially after adjustment
- Difficult to budget when future payments are uncertain
- Not ideal if you plan to stay in the home long term
In many cases, ARMs offer lower initial rates but higher long run costs than fixed rate mortgages. Know the risks before choosing an adjustable rate short term loan.
Is a Short Term VA or FHA Loan an Option?
Certain government backed mortgage programs may offer short term loans:
VA loans – The U.S. Department of Veterans Affairs guarantees loans for eligible military members and veterans. VA loans allow terms as short as 5 years.
FHA loans – Federal Housing Administration insured loans help first time home buyers with low down payments. FHA offers both 10 and 15 year fixed rate terms.
For borrowers who qualify, VA and FHA short term mortgages provide affordable financing options. Make sure to compare government loan rates and terms vs. conventional mortgage offers.
The Bottom Line
Shorter mortgage terms build home equity rapidly and can save substantially on interest costs. However, the tradeoff is higher monthly payments.
Carefully consider both the pros and cons when deciding between a short term vs. traditional 15 or 30 year mortgage. Be realistic about the monthly payments you can afford. Use an online mortgage calculator and get pre-qualified to find the best short term mortgage loan for your situation.
What we’ll cover
- How a short-term mortgage differs from more traditional mortgages
- The benefits and downsides of a short-term mortgage
- How to qualify for a short-term mortgage
If youre planning to buy a home, you’re either in it for the long or short haul — and in either case its important to understand the mortgage options available to you. Getting a 30-year home loan is the norm for most buyers. But given that the typical homebuyer expects to stay in their home for a median of 15 years , you may have some good reasons to consider a shorter mortgage term instead.
Can I refinance into a short-term mortgage?
Refinancing a mortgage could help you to secure a lower interest rate, which could save you money. You could also pay off your mortgage faster if youre moving from a longer-term mortgage to a short-term home loan.
Whether it makes sense to refinance to a shorter loan can depend on how much youve paid down on your original mortgage and how much youd have left to pay. If youve already paid down most of the interest on your current loan, you may not save much on interest costs by switching to a short-term mortgage. On the other hand, you could still get the benefit of paying the home off in less time.
59 per cent of mortgage brokers favour short-term, fixed mortgages: CTV survey
What is a short term mortgage?
A short term mortgage is one that’s paid back over 15 years or less. This type of mortgage comes with higher monthly repayments, but it means that you’ll pay less interest in total over the course of the loan.
What are the different types of short-term mortgages?
A bridging loan is another type of short-term mortgage. Bridge loans can be used to fill a temporary financing gap. So, say that you want to buy a fixer upper home and flip it for profit. If you expect to be able to sell the home within the next 12 to 18 months, you could get a short-term bridge loan with a two-year term.
What is a long-term mortgage & a short-term loan?
Another common option is a bridge loan, a six-month to three-year mortgage that allows you to finance a new home before selling your previous one. Long-term mortgages range from 15 to 30 years. The main difference between long- and short-term mortgages is that short-term loans have shorter terms.
Should you get a short term mortgage?
A lower rate, paired with a shorter loan term, means you’ll pay less interest overall to borrow. Short-term mortgages also make it easier to own your home outright faster. Instead of making payments for 30 years, a shorter loan means you could pay your home off in 10 or 15 years instead.