Most mortgages in the United States have a repayment term of 30 years, but you can pay off a home loan in less time. Short-term mortgage loans are repaid in 15 years or less. They have a higher monthly payment, but you can own your home free and clear sooner while saving thousands in interest. There are pros and cons to short-term mortgages, so itâs important to know the trade-offs before signing up for one.
When taking out a mortgage, one of the most important decisions you’ll make is choosing your loan term. The loan term refers to the length of time you’ll take to repay your mortgage. It directly impacts your interest rate, monthly payments, and the total amount you’ll pay in interest over the life of the loan.
Understanding the minimum mortgage term available and how shorter terms work is key to picking the right home loan for your financial situation. This guide will provide a comprehensive overview of minimum mortgage terms the pros and cons of shorter terms, and tips for getting a loan that meets your needs.
What is Considered a Short-Term Mortgage?
In the mortgage industry, a short-term mortgage typically refers to a loan with a term of less than 15 years. However, definitions vary by lender. Some consider short-term mortgages to have terms of 10 years or less, while others draw the line at 2 or 5 years.
The most common short-term mortgage is a 15-year fixed-rate loan. But many lenders also offer more customizable shorter-term products. For instance, Rocket Mortgage’s YOURgage program provides fixed-rate mortgages with terms as short as 8 years.
Minimum Mortgage Terms by Lender
While government agencies like FHA, VA and USDA don’t impose minimum mortgage terms individual lenders almost always set their own minimums. These are referred to as “floors” below which a lender will not go.
Many conventional lenders set their floor around 10-15 years. But some do go lower. For example, a few lenders may offer terms down to 5 years for conforming loans.
The minimum will also depend on the mortgage program. FHA loans can have terms as short as 10 years, while VA mortgages go down to 5 years. Always verify the lender’s specific policies before applying.
Why Lenders Have Minimums
Lenders set minimum mortgage terms to cover their underwriting costs. Originating mortgages requires substantial upfront expenses for staffing, technology, compliance, and overhead.
Much of this cost is fixed per loan rather than varying based on the loan amount. And with closing costs capped as a percentage of the total mortgage, small loan amounts can easily result in lenders losing money.
Minimum terms help increase revenue on tiny mortgages to offset the lender’s fixed origination costs.
The Pros and Cons of Shorter Loan Terms
Shorter mortgage terms have unique tradeoffs borrowers should understand.
Pros
- Lower interest rates
- Pay off your mortgage faster
- Build equity quicker
- Less interest paid over loan life
Cons
- Higher monthly payments
- Tougher qualification criteria
- May limit purchase price
Evaluating these factors and running the numbers for your situation will help determine if a shorter term aligns with your goals or if a longer timeframe better suits your needs.
Minimum Term Requirements and Eligibility
Aside from finding a lender that offers short-term mortgages, eligibility requirements are similar regardless of your loan term.
Minimum credit scores, down payments, and debt-to-income ratios don’t change based on term length. Though some lenders may require higher scores or income for shorter terms to ensure affordability of the larger monthly payments.
Be sure to verify if the lender has additional overlays for their shortest offerings. But in general, published eligibility guidelines for conventional loans, FHA, VA, and USDA will remain the same.
Tips for Finding a Small Mortgage Term
Since not all lenders provide minimum mortgage terms below 10 or 15 years, you may need to put in extra legwork to secure a shorter option. Here are some tips:
- Shop local lenders like credit unions and community banks
- Work with a real estate agent experienced in lower-priced homes
- Compare offers from multiple lenders to avoid minimum mortgage fees
- Consider alternative products like home equity loans if needed
The bottom line is understanding minimum term options before you apply puts you in a better position to find the right mortgage for your financial situation. Evaluating the pros, cons, costs, and eligibility criteria is essential to make an informed decision.
Frequently Asked Questions
What is the shortest mortgage term available?
The shortest terms are typically 5-10 years. But not all lenders go this low. Shop around to find one that meets your needs.
Why choose a shorter mortgage term?
The benefits include lower rates, paying your mortgage off faster, building home equity quicker, and saving on interest costs over the loan life.
What are the downsides to short mortgage terms?
Shorter terms require larger monthly payments. This can stretch your budget. Many lenders also have tougher eligibility requirements for their shortest terms.
Do minimum terms affect mortgage eligibility?
For the most part, no. Standard requirements for credit score, income, and down payment don’t change based on term length alone. But some lenders add overlays for super short terms to ensure affordability.
How can I find a lender that offers short mortgage terms?
Research local community banks and credit unions. Also work with a real estate agent experienced in lower-cost homes. Comparing multiple lender rate quotes can help uncover options.
The Bottom Line
Understanding minimum mortgage terms and evaluating whether a shorter timeframe aligns with your goals is crucial when determining the right home loan.
While government programs don’t impose minimums, individual lenders usually set floors around 10-15 years. The benefits of shorter terms can be lower rates and interest costs, faster debt repayment, and quicker equity building. But higher monthly payments are a tradeoff to consider.
Doing your homework on minimums, eligibility, costs, and alternatives can pay off to find the mortgage term that best fits your needs and financial situation.
What Are The Pros And Cons Of Short-Term Mortgages?
Many aspects of short-term mortgages may be appealing, but there are potential downsides.
Benefits of a short-term mortgage include:
- Lower interest rates. Short-term mortgage rates typically are lower than interest rates for a 30-year loan. âThe lower interest rates and shorter term means that, over the mortgage term, you pay less in interest, which is a major bonus â plus you get full ownership of the property sooner,â says Seamus Nally, CEO of TurboTenant, a company based in Fort Collins, Colorado, that makes property management software.
- You pay less interest. Between lower interest rates and fewer overall payments, the total interest you pay with short-term mortgage loans can be substantially lower than with a longer mortgage.
- You build equity faster. Lower interest rates and higher monthly payments mean youâre paying more toward your principal every month, which helps you build equity rapidly. âFor example, the amount of equity you build in five years with a 15-year loan will be much greater than what you would accumulate in a 30-year mortgage,â says Eric Croak, a Certified Financial Planner and President of Croak Capital in Toledo, Ohio. Equity translates into profit when you sell your home, or you can borrow it to pay for major expenses with a home equity loan, line of credit or cash-out refinance.
- You own your home sooner. A shorter mortgage term lets you pay off your loan and own your home free and clear more quickly. Paying off your mortgage frees up cash in your budget for other expenses, such as retirement savings or paying education expenses.
Potentially negative consequences of short-term mortgages include:
- A higher monthly payment. The higher monthly payment that comes with a short-term mortgage may be unaffordable if youâre on a budget. Even if you can afford it, it reduces the cash available for other expenses. It also limits your financial flexibility should your expenses climb or your income unexpectedly drops.
- It may limit how much you can borrow. Your budget may not adequately accommodate the higher monthly payment on a short-term mortgage for lenders to approve a loan large enough for you to afford the home you want.
- Fewer lenders offer short-term mortgages. A 30-year fixed-rate conventional mortgage is the most popular home loan in the U.S., so shorter-term mortgages are more of a niche product. Youâll have fewer options when shopping for short-term mortgage lenders, possibly because their return on investment for these loans is lower, as they make less money in interest overall.
How Do Short-Term Mortgages Work?
With a short-term mortgage, youâll make monthly payments toward the principal borrowed, the interest charged by the lender, and other costs like property taxes and homeowners insurance. But because youâre paying off the loan in less time, youâll pay more each month.
One of the most appealing things about a short-term mortgage is that it saves you money in the long run. Because youâll pay less interest over the life of the loan, thanks in part to lower interest rates, the overall cost of paying off your home will be less. In contrast, a longer-term mortgage has a lower monthly payment, but you pay more overall interest.
For example, say youâre purchasing a $500,000 home and could afford a 20% down payment. A 30-year fixed-rate mortgage at 7% would cost $2,661 a month, and youâd pay $558,036 in total interest. A 10-year short-term mortgage for the same amount at 6% would have a monthly payment of $4,441 and total interest of $132,898. The short-term option would cost $1,780 more per month, but 20 additional years of the lower payment means you pay $425,138 more in interest â more than three times as much â with the longer term.