A Complete Guide to Short-Term Mortgages

Josh is a personal finance enthusiast and writer. He began helping people learn how to refinance their homes in 2008 and has been learning and teaching mortgage and money matters ever since.

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When you’re shopping for a mortgage, you’ll quickly discover that the 30-year fixed-rate mortgage is the go-to for most home buyers. But maybe you’re not interested in a long-term commitment with a mortgage.

A short-term mortgage is a home loan with a shorter repayment period than a traditional 30-year mortgage. These loans are typically used by borrowers with a financial goal in mind, such as building equity faster, getting a lower interest rate or maximizing future profit when they sell.

This article will explain what short-term mortgages are, how they work and their pros and cons so you can make the right decision on your home buying journey.

Short-Term Mortgage: The Basics

There are many loan types under the short-term mortgage umbrella. While each loan type is unique, they all have one key element in common: a shorter repayment period.

We put together a list of common short-term mortgage options you may encounter:

• Fixed-rate mortgages: A home loan with an interest rate that stays the same for the entire term of the loan. Short-term fixed-rate mortgages usually come with 10-year or 15-year terms.
• Adjustable-rate mortgages (ARMs): ARMs offer a lower interest rate for a 3- to 10-year introductory period that later adjusts (becomes variable), usually changing with an index. Home buyers who take out ARMs usually plan on selling or refinancing the home before the introductory period ends.
• Interest-only loans: Interest-only mortgages charge borrowers interest for a set time, typically 3, 5, 7 or 10 years. At the end of the interest-only period, the monthly mortgage payment starts to cover interest and the principal loan balance.
• Balloon loans: Borrowers who take out balloon loans make low monthly mortgage payments over the life of the loan. At the end of the loan’s term, the borrower makes a large, one-time payment on the outstanding loan balance. Balloon loans are best for borrowers who are interested in low living costs or don’t plan on living in a home very long.
• Bridge loans: Bridge loans typically last a year or less. Bridge loans give borrowers money to finance the purchase of a new home before the sale of their existing home.

Most borrowers who opt for a short-term mortgage typically want to:

Build equity faster at a lower interest rate

To build equity fast at a lower interest rate, borrowers will likely consider 10-year or 15-year fixed-rate mortgages or adjustable-rate mortgages (ARMs). The loans are usually offered by traditional lenders that conform to Fannie Mae and Freddie Mac’s conventional loan requirements.

Minimize the cost of ownership to maximize profit

Mortgages, like interest-only loans or bridge loans, are designed to minimize the overall cost of ownership and maximize profitability when it’s time to sell. The loans are typically issued by nontraditional lenders, and their terms – such as interest rates, amortization schedules and more – will vary.

Nontraditional mortgages don’t fit the requirements of conventional loans. They often have lower credit score and debt-to-income (DTI) ratio requirements.