Indigo Mortgage: Advantages of Refinancing to a Short-Term Mortgage Loan

Let’s talk about home loans. While loan rates and interest can be applied to all loans, we are going to stick to home loans; though one could definitely take something home from this blog post on regular loans.

When you first buy a home, chances are you do not have the $200,000 to just throw down on the house. Instead, you will find yourself needing to get a loan from a lender otherwise known as a mortgage company. When you do this, depending on your credit score, you will be given a few different options with a bunch of fine print.

Let’s review those options first, which include long-term mortgage loans and short-term home loans.

Long-Term Mortgage Loans

A longer term loan tends to be 30 years in length. This means you do not have to pay the loan back in full for thirty years. Basically, you will get a monthly bill similar to that of credit card bill where your payment includes principle, interest, and sometimes an escrow account payment.

With over 30 years at 12 times a year to pay off a $200,000 house is not so bad and for many it is the way to go. As noted, part of the monthly payments is an interest rate. It is where the lender makes money for giving you so much money to cover your house.

What does happen is that the amount you have to pay back can double from the original $200,000 if you take the entire 30 years to pay it back because of the amount of interest you would have paid over that length of time. For many, this is all they can do because of their budget, but there are alternatives if you can pay a higher monthly payment.

Short-Term Home Loans

To pay out less interest, you can shorten the term of the mortgage loan to 15 years, for example. Although the monthly payments are higher with these types of home loans, the interest is lower. This means that you will pay considerably less over the 15 years than you would if you had stuck with a 30-year home loan.

So, if these loans are so much better than the long-term mortgage loans, why doesn't everybody use them? Typically, this is because most people cannot pay that much out of their salary in a house payment each month and need to budget for a smaller payment.

It can take quite a chunk out of your monthly income despite saving you considerably in the long run.

There may be uncertainties that keep many opting for a longer loan with a smaller payment now. Others may not want to stay in the house for a long time or are using it as an investment property so a short-term home loan may not work for them.

Options for Switching to a Short-Term Mortgage Loan

That is not to say that, when your situation changes that you cannot shorten the term of your home loan by refinancing to a short-term mortgage loan or simply making extra principle payments each year. Either way, you can find ways to cut your interest payouts.