By Bill Lyons | Published on October 19, 2023
TABLE OF CONTENTS

    The right mortgage program can help you save money while paying off your debt. While 30-year mortgages are the most common, they’re not your only option. Some borrowers may prefer a short-term mortgage that allows them to save on interest payments and pay off their home in a shorter amount of time.

    Unfortunately, short-term mortgages aren’t right for everyone. They come with higher monthly payments that may mean you won’t qualify. As a home buyer, learning about your options can help you find the best mortgage option based on your unique financial situation.

    So what is a short-term loan—and is it the best option for you? Keep reading to learn more about short-term mortgage loans and how they differ from other types of mortgages.

    KEY TAKEAWAYS

    • A short-term mortgage is any mortgage program that matures in less than 10-15 years.
    • Short-term mortgages come with higher monthly payments but lower interest rates and less interest paid over the life of the loan because of shorter repayment periods.
    • Short-term mortgages may be a good option to build equity or outright own the home faster than long-term mortgages.

    What Is a Short-Term Home Loan?

    A short-term loan is a type of mortgage that matures in fewer than ten years. However, some lenders consider 15-year mortgages short-term loans. Most traditional mortgages range in repayment periods from 15 to 30 years, with the most common being 30 years. A short-term mortgage is short-term, meaning you pay it off much faster than other types of home loans.

    These types of home loans typically come with lower interest rates. However, because you’re getting the same loan amount as you would with a 30-year loan, your monthly mortgage payments will be higher because you have less than half the time to pay it off.

    The best short-term loans can help you save money on your mortgage, but short-term mortgages aren’t right for every borrower. However, if you can afford the higher monthly payments, you can benefit from rapidly building equity, ensuring you can gain full ownership of the home faster.

    There are several types of short-term mortgages, the most common being fixed and adjustable-rate mortgages (ARMs). With fixed-rate mortgages, the interest rate remains constant for the entire loan term. On the other hand, ARMs have lower interest rates for an introductory period before adjusting based on current market conditions.

    You can also choose an interest-only short-term loan that allows you to pay off interest for the first several years of the loan before you begin paying your principal balance. 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 vs. short-term mortgages

    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. However, while loan repayment periods are different between these two types of loans, there are other differences that can help you determine which is best for you.

    Short-term mortgages have higher monthly payments, but you’ll pay significantly less in interest over the life of the loan. That means your loan will be less costly in the long run.

    On the other hand, long-term mortgages, such as a 30-year mortgage, are common because they give borrowers more time to repay their loans. With longer repayment periods, borrowers pay less monthly but more in interest over the life of the loan.

    While your monthly mortgage statement will have a higher number with a short-term loan, you’ll pay less interest. Short-term mortgages also typically come with lower interest rates because you can repay your loan faster. Typically, the shorter a lender has to wait to get their money back, the lower their risk, allowing them to offer lower rates on these loans.

    Thus, borrowers save on interest in two ways. Firstly, they’ll pay less in interest over the life of the loan because they’ll only have a loan for up to ten years. Then, they save even more with lower interest rates than 30-year mortgages.

    Not all borrowers will qualify for short-term mortgages. Because they require higher monthly payments, lenders must consider factors like income, assets, debts, DTI, and credit score to determine if someone is eligible for these types of loans.

    Keep in mind that even if you don’t qualify for a short-term loan, you may still qualify for a long-term mortgage.

    How Does a Short-Term Mortgage Work?

    A short-term mortgage works similarly to a long-term mortgage. However, since the term is shorter, you’ll end up with larger monthly payments. Of course, how exactly your short-term mortgage works will largely depend on the type of loan you take out. For instance, Non-QM loans have different eligibility criteria than conventional loans.

    In any case, you’ll be responsible for monthly payments to cover the principal, interest, taxes, and insurance of a mortgage loan.

    Your total monthly payment will vary depending on the type of home loan. However, the shorter the repayment period, the higher your monthly payment will be, so it’s worth calculating whether you can afford a short-term mortgage loan.

    Interest rates will also depend on the type of loan. For instance, short-term ARMs feature lower interest rates upfront, but that rate is subject to change after the introductory period.

    Short-Term Mortgage Qualification Requirements

    A woman hands new house keys over to a smiling white couple.

    Qualification requirements may vary based on the type of loan you take out. Lenders may be more strict about income, cash reserves, and down payment amounts since you’ll take on a larger monthly payment than a long-term mortgage.

    The qualifications for a short-term mortgage are similar to those for a long-term mortgage. Essentially, the lender will consider the same factors for both to determine your ability to repay the loan.

    A few factors that impact your short-term home loan eligibility include the following:

    • Credit score
    • Credit history
    • Income
    • Debt-to-income (DTI) ratio
    • Assets
    • Down payment

    For short-term loans, you’ll need to have a down payment and closing costs saved. To avoid private mortgage insurance (PMI), which can drastically increase your monthly payments, you should aim to put 20% down.

    In addition, lenders will review your employment history to ensure you have a reliable stream of income. This is especially important for short-term loans because you’ll have higher monthly payments. Short-term loan borrowers generally need to earn a higher income than long-term loan borrowers for the same loan amounts because they have much higher monthly payments.

    Lenders will also consider your existing debt to ensure you’ll be able to repay your mortgage on a monthly basis.

    Based on your income, credit score, debts, and other figures, you may not qualify for a short-term loan because of the higher monthly payments. Instead, a lender might suggest long-term mortgage loans that allow you to purchase your dream home without the additional burden of larger monthly payments.

    Pros of Short-Term Mortgage Loans

    Short-term mortgage loans are best suited for borrowers who can afford higher monthly payments and want to build home equity as fast as possible. A few benefits of short-term mortgage loans include the following;

    • Paying less in interest: One of the most significant differences between short- and long-term mortgages is the interest rate and how much you pay in interest over the life of the loan. Short-term mortgage loans have the lowest interest rates compared to a 15- or 30-year mortgage. In addition, because you’ll pay off your loan faster, you’ll end up paying much less in interest over the life of the loan.
    • Faster route to homeownership: With short-term mortgage loans, you own your home faster than with 30-year mortgages. This means after just ten years (or less), you’ll own your home and stop making mortgage payments, allowing you to save up for other investments.
    • Building equity: Paying a larger amount toward your principal balance every month allows you to build home equity much faster. The faster you build equity, the more you’ll have to use down the line if you need it.

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    Cons of Short-Term Mortgage Loans

    No mortgage program is perfect for all types of borrowers. While the pros of owning your home faster and paying less in interest are appealing, there are several disadvantages of short-term loans, such as:

    • High monthly payments: Short-term mortgages are less affordable than long-term loans because they have higher monthly payments. Even if you can afford the higher monthly payments, you might not want to take out a short-term mortgage loan because it reduces your monthly cash flow. Instead, you might choose to save that cash for something else, like investments or paying off other types of debt. Unfortunately, these higher monthly payments also mean some borrowers may not qualify based on their monthly incomes. With a short-term mortgage you are stuck with a large monthly payment—if it becomes unaffordable, you will have to refinance and, if rates are high at the moment, this could lead to you paying even more in interest over the loan term.
    • Longer loan terms can offer similar benefits: While a short-term mortgage allows you to more quickly build equity and pay off your home, you can essentially accomplish the same thing with a 30-year mortgage. If you have a 30-year fixed mortgage, you can more quickly build equity and pay off the mortgage faster by simply making extra principal payments. This will require discipline, but it can pay off if you can afford it.
    • Lower loan amount: Borrowers can expect lower loan amounts with a short-term mortgage because they’ll have less time to repay the loan. Lenders must consider how much they can afford each month with a shorter repayment period, which can drastically reduce the total loan amount compared to a long-term loan. Simply put, you can get a higher loan amount with a long-term loan because it has a longer repayment period, decreasing your monthly payments and allowing you to afford a more expensive home even though it means spending more in interest over the life of the loan.
    • Strict eligibility requirements: To qualify for a short-term loan, you’ll need to demonstrate your ability to repay it. Lenders expect higher incomes and lower DTI ratios to ensure you can afford the higher monthly payments. Ultimately, based on these factors, you may qualify for a long-term loan but not a short-term one.
    • Higher risk of default: These loans are riskier for borrowers because they come with much higher monthly payments. Before applying for a short-term loan, you should determine whether the higher monthly payments can fit into your budget comfortably to ensure you can avoid defaulting on the loan.
    • Limited availability: Not every mortgage lender offers short-term loans. Lenders typically prefer long-term mortgages because they have higher ROIs. In addition, even if you find a lender that does offer them, they may have more stringent lending requirements, such as higher incomes and credit scores and lower DTIs.

    Long-Term vs. Short-Term Loan: Which Is Better?

    Without understanding your unique financial situation, we can’t know whether a long-term or short-term loan is better for you. Some borrowers might prefer saving money now with a 30-year mortgage with lower monthly payments, while others want a faster route to homeownership with a short-term loan.

    The better option depends on your unique financial situation, goals, plans, and preferences. Here are a few situations when a short-term loan makes sense if you can afford the monthly payments:

    • To build equity fast: With a short-term loan, you can build equity faster with a lower interest rate since you’ll pay down your principal balance quicker than with a long-term mortgage loan.
    • To minimize the cost of homeownership: Lower interest rates and lower interest paid over the life of the loan means paying less to be a homeowner. Then, when it’s time to sell your home, you can increase your return on investment.
    • You’re older: Older borrowers may prefer short-term mortgages if they want to pay off their loans before retiring. This frees up additional cash flow in retirement since you won’t have to worry about paying your mortgage after you’re no longer working.
    • You want to move: If you’re planning on moving but haven’t sold your current home yet, you might qualify for a short-term bridge loan that bridges the gap between your old home and a new one. These loans are primarily for borrowers who need to finance a new home while their current property is still on the market and waiting to be sold.

    Unfortunately, short-term loans aren’t the right option for everyone. While most borrowers want to reduce the total cost of the loan, it’s not always possible. In many situations, a lower monthly payment with a long-term loan improves accessibility to homeownership even though it means paying more over the life of the loan.

    Explore Short-Term Mortgage Options

    A man and a woman carrying cardboard boxes walk into a new home with their two young daughters ahead of them.

    Short-term mortgage loans can help you build equity in your home while putting you on a faster route to homeownership. At the same time, they come with higher monthly payments because of their shorter repayment periods. However, if you can afford these higher monthly payments, you’ll reap the benefits of lower interest rates and less interest paid throughout the life of the loan. Paying less interest can potentially increase your return on investment when you decide to sell.

    Not all borrowers qualify for short-term mortgages. Talk to a Griffin Funding mortgage specialist today to learn whether short-term mortgages are right for you and explore our options.

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    Frequently Asked Questions

    Do short-term loans have higher interest rates?

    hort-term loans typically have lower interest rates because they have shorter repayment periods, meaning lenders get their money back faster. In addition, you’ll pay less interest overall because you have that shorter repayment period. Longer terms mean more interest paid, but they can be potentially more affordable because they have lower monthly payments.

    However, if you can afford the higher monthly payments, a short-term loan might be the better option because it allows you to save more over the life of the loan. In addition, you’ll gain total homeownership much faster, allowing you to take advantage of more equity you’ve built in less time.

    Keep in mind that your interest rate will be determined by factors like the type of loan and current market conditions as well as personal financial factors, such as:
    • Credit score: The higher your credit, the less of a risk you are to lenders, allowing them to give you lower interest rates on loans.
    • Down payment: The higher your down payment, the less you’ll need to borrow, making you less likely to default on your loan. Lenders reward less risk with lower interest rates.
    • DTI ratio: Lenders determine how much of your monthly income goes toward paying debts. The less debt you have, the lower your interest rate will be.
    • Occupancy: Whether the home is your primary or secondary residence or investment property can impact interest rates. Interest rates are typically lowest on loans for primary residences and higher for investment properties.

    Why would you want a short-term mortgage?

    The main reason why borrowers choose short-term mortgages is to save money. While the high monthly payments can deter some borrowers, these loans come with less interest, potentially saving tens of thousands of dollars over the life of the loan. The faster you pay off your loan balance, the faster you become the outright owner of the home.

    In addition, a short-term loan allows you to become debt-free faster, freeing up cash flow for other opportunities like investments or paying off other types of debt. This can benefit borrowers of any age, helping them become homeowners faster while eliminating monthly mortgage payments within just ten years or less.

    Can I refinance to a short-term mortgage?

    Yes, you can refinance your existing mortgage to a short-term mortgage to help you reduce your interest rate and save money over the life of the loan. Of course, you should only do this if you can afford the higher monthly payments. Refinancing can help you pay off your mortgage faster if it makes sense for you based on how much you’ve already repaid on your mortgage.

    In any case, you’ll be able to repay your mortgage loan in less time, allowing you to quickly build equity and take a faster route to homeownership.

    Remember, the main purpose of refinancing your mortgage is to get better terms or take advantage of the existing equity in your home. Shortening the length of your mortgage means larger payments but saving more in interest over time. Meanwhile, extending your mortgage loan term means reducing your monthly payments while paying more in interest over time. Which option is right for you will depend on your unique financial situation.

    For instance, you may choose to refinance to a short-term mortgage if you’ve recently gotten promoted or earn more money now, allowing you to pay off your mortgage much faster because you can afford to do so.

    What’s most important is determining whether you’d like to save money now or later.

    How do I figure out whether I can afford a short-term mortgage loan?

    Figuring out whether you can afford a short-term mortgage loan is the same way you’d figure out whether you can afford any type of home loan. You’ll need to consider the loan amount, interest rate, loan terms, mortgage insurance, HOA fees, and taxes to determine how much home you can afford.

    As a general rule of thumb, no more than 28% of your gross income should go to paying your mortgage. Therefore, if you earn $100,000 per year, you should only spend $28,000, or $2,333 per month, on a mortgage. In addition, your mortgage should make up no more than 36% of your total debt.

    If you are VA eligible, you can use our VA loan calculator to compare a 30-year VA loan and a 15-year VA loan to determine which option is better for you.

    Of course, the total cost of your loan will also be determined by your down payment, DTI, credit score, and current interest rates. The only way to know whether you can afford a short-term mortgage loan is to talk to a lender.

    Our mortgage specialists can help you determine whether you can afford a short-term mortgage and how much house you can afford by comparing your income and debts while factoring in other financial factors like credit score.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.