When it comes to applying for a home mortgage loan, there are many choices and decisions to make. For example, what type of loan can you qualify for? Should you go with a variable or fixed interest rate? How long (or short) of a term? For prospective homebuyers still researching their options, this article is for you. We’ll explain what a mortgage term is and explore the pros and cons of both short and long-term home loans.
What is a Mortgage term?
Your mortgage loan term is the length of time you have to repay the loan. The three most common mortgage terms are 15, 20, or 30 years. The shorter your mortgage term, the fewer total payments you’ll have and the less interest you’ll pay overall. However, many people cannot afford the higher monthly payments that come with a shorter term mortgage. Another option is to choose a longer term and then pay your mortgage off early if you can afford to do so.
What is a short-term mortgage?
A short-term mortgage loan refers to any term of less than 10 years. At CS Bank we offer short-term mortgage loans of three, five, or seven-year terms.
Choosing a short-term mortgage means your home will be paid off faster. However, this type of mortgage may come with a higher interest rate than a longer term mortgage. This is because short-term loans are considered primary mortgages, meaning we cannot sell them to a third-party. Also, mortgage lenders need to make a certain amount of money from interest to justify loaning the money, that is why higher rates may come with shorter terms. And, as mentioned above, the shorter the term, the higher your monthly payment will be.
What is a long-term mortgage loan?
Mortgage loans that mature in 10 or more years are considered long-term loans. At CS Bank we offer long-term mortgage loans of 10, 15, 20, 25, & 30-year terms.
Choosing a long-term mortgage means your monthly payment will be lower because you have more time to pay off the principal. Generally, 15-year terms offer the lowest rates, but if you choose a longer term you still have the option of paying your mortgage off early without penalty. That is why a 30-year mortgage term is a great option for many people. 30-year mortgages offer the lowest monthly payment option, which can make the difference between being able to buy a home or not. Then, if your income increases later on in your mortgage, you can make extra payments on the principal to pay it off faster and reduce the total interest paid overall.
Another thing to know about long-term mortgages is that they can be sold in the secondary mortgage market, which allows primary lenders like us to make more loans to local businesses and homebuyers.
The Secondary Mortgage Market is where lenders and investors buy and sell home loans and servicing rights. The only way you may be affected as a new homeowner is by getting transferred to a new loan servicer. Loan servicers manage your mortgage loan by sending your monthly statements, processing payments, providing customer service, and more. If your mortgage loan is sold on the secondary mortgage market, you’ll receive a notice in the mail with information on where/how to make future payments. Other than that, you won’t experience any changes or interruptions in service.
Why Choose a Short-Term Mortgage?
When you take out a short-term mortgage loan, you pay off your home faster and your lender is repaid sooner without having to resell your loan. This might sound like a win-win for everyone, but the higher monthly payments are not affordable for everyone. Here are the best reasons to choose a short-term mortgage:
- Age: Older adults may have an easier time getting a short-term mortgage and may want to have their home paid off before retiring.
- Bridge loan alternative: If you want or need to buy your next home before your current house sells, a short-term mortgage could be a good option, with the proceeds from the sale of your current home paying off most or all of the balance.
- Lock in a low rate: If interest rates are historically low, you can lock in a great interest rate and APY and know that you’ll have the mortgage paid off before rates have much time to rise.
- Flexibility: If your income fluctuates from being self-employed or a small business owner, you may want to pay off your mortgage faster, while your income is still high enough.
Don’t see yourself in these examples? Short-term mortgages don’t work for everyone, which is why the average mortgage term length is 25 years. Let’s look at the benefits of having a long-term, fixed-rate mortgage.
What are the benefits of a long-term mortgage?
Short-term mortgages can also come with a fixed rate, so let’s compare the benefits of longer mortgage terms:
- Tax benefits: The interest you pay on your mortgage can be tax-deductible if the loan was used to buy, build, or renovate your home.
- Easier to qualify: A longer term means lower monthly payments, which makes it easier to meet debt-to-income ratio requirements.
- More affordable: Lower monthly payments make a mortgage more affordable, especially for first-time homebuyers who haven’t reached their peak income potential yet.
- Free cash for other uses: Since you’re not pouring as much money into your mortgage every month, you can use that other cash to save for retirement, invest, pay a child’s education costs, etc.
- Flexibility: With a longer term mortgage, you can still pay the loan off early if you wish, without committing to a shorter timeline upfront.
As you can see, there are many reasons to consider a long-term, fixed-rate mortgage. But short-term mortgages and variable-rate mortgages are also good options for the right borrowers. If you have questions about your mortgage options or need help choosing the right term length, contact a CS Bank mortgage lender.
Apply for a mortgage loan from CS Bank!
Looking for a short-term or long-term mortgage in Northwest Arkansas? CS Bank is your local mortgage company. Our experienced, friendly team of lenders are here to help you find the best home loan options for your needs. Apply for a mortgage online today! To learn more about fixed-rate mortgages, check out our loan calculator, fill out our online contact form, or visit one of our convenient locations in Eureka Springs, Huntsville, Harrison, Holiday Island, Berryville, Arkansas, or Cassville, Missouri to speak with a loan officer.
Buying Your First Home? Check out our First Time Home Buyer’s Guide