Short-term mortgages are mortgage loans that are financed for twenty years or less. Mortgages of this type typically involve higher monthly payments, but offer the benefit of paying less in interest over the course of the loan. Since the debtor pays less over the life of the loan, this approach can often be a better option than going with a traditional thirty-year mortgage.
Most banks offer short-term mortgage contracts that cover the same basic options as any other mortgage type. It is possible to obtain a fixed rate of interest with the loan, an option that may be a good idea if that rate is competitive and likely to remain so for the entire duration of the mortgage. Variable or flexible rates are also often available, and may be ideal if there is evidence that the prime lending rate is likely to decrease significantly for a substantial portion of the mortgage’s life.
While the short-term mortgage does offer substantial savings over the long run, this approach is not right for every consumer. In order to identify the type of mortgage that is most practical, the debtor should work with the lender to project the total payout involved with the traditional thirty-year mortgage as well as with a short-term mortgage of fifteen or twenty years. The idea is to not only identify the total amount paid, but also determine the amount of the monthly installment payments that would apply to the contract.
If the results show that the debtor can comfortably afford the higher payments associated with the short-term mortgage arrangement, then the decision is clear. Should the monthly payment on the short-term arrangement be more than the debtor can reasonably manage, then the traditional thirty-year mortgage is the better solution. This is because making sure the payments are manageable minimizes the potential for late payments and possible default that would damage the debtor’s credit rating.
Lenders may or may not offer more aggressive interest rates on short-term mortgage contracts. In some instances, the rate schedule will apply equally to short-term and traditional packages. There are some situations in which the lender may extend more competitive rates on the ten, fifteen, or twenty year mortgage, but there are often additional qualifications that the debtor must meet in order to command those lower rates. Since lenders stand to earn more return from mortgages with a longer duration, clients who are seeking to explore available mortgage options may have to specifically ask about any short-term mortgage plans that the lender has available.
