A complete guide to short-term mortgages

When you take out a mortgage to buy a home, your loan term is the amount of time you have to pay it back. Your loan term also affects your interest rate, monthly payment, and the total amount of interest you pay for your loan. A short-term mortgage can help you reduce the amount of interest you have to pay – that is, if you can afford a higher monthly payment.

The good news is you get to pick the loan term that best fits your financial situation. Understanding the pros and cons of longer- and shorter-term mortgages can help you find the loan that’s right for you. Here’s a rundown of everything you need to know about short-term mortgages.

What is a short-term mortgage?

Any home loan that matures in less than 15 years is typically considered a short-term mortgage. However, this definition can vary by lender. Some lenders consider a short-term mortgage to be a loan that matures in 10 years or less, while others draw the line at 2 or 5 years.  

Regardless of the exact loan term, short-term mortgages typically come with lower interest rates. However, they also require higher monthly payments because you’re repaying the loan over a shorter period of time. Even though you’ll be paying more each month, you’ll pay less interest overall with a short-term mortgage.

If you can afford the higher monthly payments, you’ll be rewarded with the ability to build equity in your property more rapidly than you would with a long-term loan. This puts you on a faster track to gain full ownership of your home.

The most common type of short-term mortgage is a 15-year mortgage, but customizable loan terms are available.

If you're looking for a short-term loan, the Rocket Mortgage YOURgage^® program offers fixed-rate loans with the option to pick any term starting as short as 8 years.

Short-term vs. long-term mortgage: What’s the difference?

Short-term mortgages and long-term mortgages have different term lengths. However, that’s not the only difference. Choosing between a short-term or long-term mortgage will also affect how much you pay in interest each month and overall – and how fast you build equity.

Shorter mortgage term

Shorter-term mortgages typically last 10 – 15 years. Here’s how they compare to longer-term loans:

• Higher monthly payments.
• Lower interest rates.
• You build equity faster.
• You’ll pay off the loan faster.
• Less interest paid overall.
• Can be beneficial is you are planning to move soon.

Longer mortgage term

Longer-term mortgages mature in 20 – 30 years. The 30-year fixed-rate mortgage is the most common type of mortgage and is chosen by 90% of home buyers. One common reason is that a longer mortgage term can get you access to a lower monthly payment. The downside is you’ll typically be paying more in overall interest.

Here’s how a longer mortgage term compares to a short-term mortgage:

• Lower monthly payments.
• Makes homeownership more accessible.
• Higher interest rates.
• You build equity at a slower rate.
• Takes longer to pay off the loan.
• More interest paid overall.

How do short-term mortgages work?

With any mortgage, homeowners make monthly payments. These payments cover the principal balance, interest on the loan, and other expenses like taxes and insurance.

Short-term mortgages function the same as long-term loans, but you’ll have a larger monthly payment and will pay down your principal more quickly due to the shorter loan term.

Suppose you take out a mortgage to buy a $350,000 home and you’re trying to decide between a 10-year loan term or a 30-year loan term. The lender offers you a 6% interest rate on the 10-year loan, and a 6.5% interest rate on the 30-year term. Here’s what your monthly payments would look like and how much your loan would cost in either scenario.

If you can afford to make the larger monthly payment, short-term mortgages can save you money over the life of the loan because these loans typically come with lower interest rates. In this example, your monthly payment would be $1,380 higher with the 10-year loan term, but you’d pay almost four times as much interest over the life of the 30-year loan term.

When lenders determine interest rates, they’re accounting for the inflation that’ll 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 the borrower can enjoy lower interest payments.

And since there are also fewer monthly payments overall, these homeowners will pay significantly less in interest than those with long-term mortgages.

If you’re unsure can afford the larger payments associated with a short-term mortgage, we recommend calculating your mortgage payment before applying.

The pros and cons of short-term mortgages

To decide if a short-term mortgage is the right option for you, it’s important to be aware of the tradeoffs. Let’s take a look at some of the advantages and drawbacks of a shorter loan term.

Pros

Here are some benefits of choosing a short-term mortgage:

• Pay less interest. Compared with a 15-year or 30-year mortgage with higher interest rates, the best short-term mortgages offer lower interest rates, saving you money over the life of the loan.
• Own your home sooner. Making payments for a shorter time allows you to own your home sooner. This may allow you to put money toward other financial goals, such as purchasing an investment property or buying a vacation home in addition to your current home.
• Build equity faster. Paying down the loan’s principal balance faster can build equity in your home more quickly – and increasing home equity can benefit homeowners in many ways. For example, a home equity loan can be used to make home improvements or to consolidate.

Cons

There are downsides to short-term mortgages, so be on the lookout for the following:

• Higher mortgage payments. Short-term mortgages require higher monthly payments than 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. Because of their unique terms, they aren’t as popular as 15- or 30-year loan options.
• Strict eligibility requirements. Lenders typically have tougher eligibility criteria to make sure you can afford the higher monthly payments.
• May limit how much you can borrow. You may not be able to buy a pricier home with a short-term loan due to the higher payments.

FAQ: Short-term mortgages

It’s important to ask questions before you take on a financial commitment like a mortgage. Here are answers to some common ones.

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, cash in on their home’s equity, or reduce the life of the loan. But when considering a refinance, it’s important to ensure the new mortgage terms would improve your current rates and terms. And don’t forget, you’ll also need to pay closing costs on your new home loan.

Can I get a short-term mortgage?

Short-term mortgages require higher monthly payments due to the shortened loan length. As a result, borrowers need a higher income to afford this loan term. Even if you’re able to get approved for a short-term mortgage, it’s important to make sure you can keep up with the payments.

How do I qualify for a short-term mortgage?

Like traditional mortgage lenders, your short-term mortgage lender will review your credit score, credit history, income, DTI ratio, assets and liabilities to determine whether you qualify for this mortgage type. To find out the specific requirements of your lender, you can apply for initial approval.

How do I know if I can afford a short-term mortgage loan?

To determine if you can afford a short-term mortgage, you can use our mortgage calculator to see how your interest rate, loan amount, and loan term will affect your monthly payment. Be sure to also consider homeowners insurance, property taxes, and the ongoing costs of homeownership, like maintenance and repairs. A common guideline is the make sure that your mortgage payment doesn’t exceed 28% of your gross income and your total debt doesn’t exceed 36% of your income.

The bottom line: See if you qualify for a short-term mortgage

Short term mortgages can be a great loan option if you want to build equity faster and minimize the amount of interest you’ll have to pay on your loan. However, short-term mortgages require higher monthly payments. Depending on your financial situation, it may make more sense to go with a longer loan term to keep your monthly payments affordable.

If you think a shot-term mortgage is right for you, Rocket Mortgage^® has options as short as 8 years. Start your application today to find the best loan for you.