Reason To Avoid Short Term Mortgages

 


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Going with a shorter term mortgage can lead to a significant savings on the financing of your home. There are, however, certain situations where you should not go with a shorter term.

The term of a home loan is a key factor when it comes to figuring out your total cost. The term simply refers to the number of years or months it will take to pay off the loan. The traditional 30 year mortgage had a term of 360 months or 30 years. That is a major financial commitment on your part.

For many people, applying for a shorter term mortgage makes sense. More and more these days, I see people looking for 15 and 10 year mortgages. Why? Well, one tends to get a lower interest rate because the lender has less risk since you are paying the money back faster. There are also major savings on the total interest for the same reason. The downside, of course, is the monthly payment is going to be a bit more. That being said, there are also other times you should avoid a short term mortgage.

The number one situation where you should avoid a short term mortgage is if you are buying a property for investment purposes. By this, I mean you intend to sell the home in a few years. You might be buying a fixer upper for example. In such a situation, there is little benefit to higher monthly payments associated with the shorter term. Since you will be selling in a few years, the savings on the interest paid is also negligible. If you are investing in a home to flip it in a few years, try to get the longest possible term so you can minimize your cash expense.

The second reason to avoid a short term mortgage has to do with the loan program. There are short term mortgage that are designed such that the debt owed is paid off with the last payment. Some short term loans, however, are designed to give you low monthly payments in exchange for a massive payment at the end of the term. These are known as balloon payments, to wit, the vast majority of the amount borrowed comes due at the end of the loan. These balloon loans are very dangerous. If you get stuck at the end of the loan term, you either have to come up with hundreds of thousands of dollars or lose the property. Such loans are generally to be avoided unless you have a clear and definite exit strategy.

All and all, short term loans are generally a good idea if you want to save some money over the life of the loan and can afford the increased monthly payments. Just make sure you understand your goals and what you are getting into.

Sergio Haros is with Great Western Mortgage - providing San Diego mortgage loans to people with good and bad credit.

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