Why Shorter-Term Mortgage Loans May Be Smart Right Now
When most people buy a home, they automatically gravitate toward the 30-year mortgage. After all, it usually gives you the lowest payment, and it allows you to spread out that loan over many, many years.
In short: It can feel manageable, affordable, and low-pressure.
They’re not perfect, though. In fact, 30-year loans actually come with the highest interest costs. Not only are rates usually higher on these mortgages, but they also mean paying interest for years — often decades — longer than other loan options.
Fortunately, there’s never been a better time to get a short-term loan. And a shorter-term mortgage? That means thousands (possibly tens of thousands) saved over time.
Are you preparing to buy a house or refinance in the near future?
3 reasons why getting a shorter-term mortgage loan may be smart right now
1. Interest rates are historically low.
Interest rates are really low at the time this blog is being written. And the lower they go? The more affordable it makes a short-term mortgage payment.
According to Freddie Mac, the average rate on a 15-year mortgage loan is just 2.1% right now. Three years ago, rates on those loans were nearly 4%. That’s a pretty big difference when you consider the amount of interest you’ll save in the long run.
Shorter-term mortgage loans can be a great choice when refinancing. If you got your loan years ago when rates were in the 4%, 5%, or even 6% range, imagine how much you could save per month by choosing a low-interest, short-term loan. (It’s probably quite a bit.)
2. Home prices are rising.
Home prices have been on the rise for some time. In fact, the most recent House Price Index from the Federal Housing Finance Agency shows home prices up a whopping 15.7% over the year.
Low interest rates help offset those rising prices. And short-term loans? They usually have the lowest rates of all.
Getting a low rate may also allow you to expand your buying budget. For example, let’s say you can afford a $1,200 monthly payment and nothing more. At rates three years ago (the 4% mentioned above), that would’ve meant a house around $162,000. At today’s low rate, you might feel comfortable going up to $184,000 and still enjoy that same $1,200 payment.
Essentially, a lower rate may let you buy a higher-priced house (or offer more to win a bidding war).
3. Housing is incredibly hot.
Housing is incredibly hot right now, and many homeowners are choosing to sell much earlier than they expected. (Hello, huge profits!)
In the event you choose to sell sooner rather than later, a short-term loan might be your best bet. Not only do these loans minimize your interest costs, but they also help you build equity faster — which means even more in profits once you sell.
If you’re absolutely sure you’re going to sell in the next few years, you might even think about a short-term adjustable-rate mortgage, which gives you an even lower interest rate for the first few years of your loan. It’s a great way to reduce your monthly payment and the long-term costs of borrowing the money.
What to know about short-term mortgage loans
Shorter-term mortgage loans come in all shapes and sizes. You can do a 15-year loan, a 10-year one, or in many cases, an adjustable-rate loan for three, five, or seven years. The options will vary depending on your mortgage lender.
You should also know that shorter-term loans usually come with higher monthly payments when compared to a 30-year mortgage. The big benefit is that your loan is paid off much sooner, leaving you debt-free and with thousands extra per month not too far down the line.
Lower interest rates and reduced borrowing costs are also a huge advantage with short-term mortgages — particularly in today’s very low-rate environment.
Should you get a shorter-term mortgage?
There’s no hard and fast answer here. The right choice really depends on your goals as a buyer or refinancer, as well as your household budget and financial situation.
If you’re not sure whether a short- or long-term mortgage loan is the best choice for you, talk to a loan expert or financial advisor. They can point you toward the right loan for your particular situation.