Short-term Mortgage: Is it a Good Option when Refinancing your Home?

Banks Editorial Team · April 27, 2018

Short-term mortgage is the right option for home refinancing to pay off a home loan quicker and build home equity faster. However, homeowners considering this option should be prepared to pay higher monthly installments in exchange for thousands of dollars in interest savings. It may be a good option for home refinancing if the homeowner is looking to pay off their home loan faster in spite of higher monthly payments.

Home Refinancing Options

There are several home refinancing options you can choose from once you’ve decided to take out a new mortgage: long-term, short-term, and cash-out refinance. Of these, short-term mortgage offers an attractive option in terms of quicker loan payment and thousands of dollars in interest savings. But is it the right one for you?

It earns lower interest rates compared to longer mortgage terms because they are quicker to pay off. This refinancing option also builds home equity faster. Most important of all, a short-term mortgage can help save thousands of dollars in interest rates and charges.

Short-term Mortgage: Factors to Consider

Choosing short-term mortgage as your home refinancing option depends on several factors.

  • Motivation
  • Resources
  • Size of the loan
  • Potential savings

Motivation

You may want to pay off your 10-year fixed-rate mortgage quicker, so you may refinance it into a 5-year mortgage. To do so, you need to consider whether your resources can handle the increase in monthly payment. If the increase is only minimal and you are willing to sacrifice for the meantime, then a short-term mortgage is right for you.

Resources

If you find that you can’t afford an increase in your monthly payments, you may want to find another refinancing option that works with your resources.

Loan Size

Another factor to consider when choosing a this type of mortgage as your home refinancing loan is your loan size. If taking out a new short mortgage only yields incremental interest savings, then reconsider your refinancing option. A short-term mortgage refinancing option may make sense for a $500,000 loan but not for a $100,000 loan.

Be also aware that taking out a home refinance mortgage, whether short or long-term, entails fees that increase the original loan amount. This may include appraisal, escrow, title policy, underwriting, tax service and others. Weigh the benefits and drawbacks of shifting to a short-term mortgage refinancing option if additional costs increase the original loan size significantly.

Potential Savings

Another reason you may want to take out a short-term mortgage on your home refinancing are the potential savings on interest rates. If there was a radical drop in interest rates, you may want to take advantage of this by taking out a short-term mortgage to refinance your home loan. Again, you should consider whether the potential savings in interest outweigh the higher monthly installments you will have to pay in order to maximize your short-term mortgage.

Other Considerations

You may also want to consider short-term mortgage as your home refinancing option if you want to beef up your home equity faster. A short-term mortgage can be valuable in paying off a home loan before retirement and using the equity to even out losses in retirement savings. A solid equity also makes the home a better sell in the market.

Conclusion

To summarize, if you are looking to build up your home equity faster, save thousands of dollars in interest, or pay off your mortgage quicker, then a short-term mortgage is the right option for your home refinancing. However, this refinancing option does not come without any drawbacks. A homeowner looking for short-term mortgage refinancing should be ready to pay higher monthly installments in exchange for savings in home loan interests.

 

 

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