Finding and purchasing a new a new home may be stressful, but deciding on a long-term vs. short-term loan can be downright discouraging. Signing a long-term loan is like agreeing to marriage; you’ll be paying off your house for the next 25 to 30 years. On the other hand, purchasing a short-term mortgage loan can mean saying bye-bye to your monthly income.
So how do we decide? Fortunately, home prices continue to hit record highs, so there are dividends to made off of either investment. Also, you need to look at your home as an asset as much as it is a home. By reviewing the pros and cons of a short-term vs. long-term loan you can feel more comfortable making a decision and choose which is right for you.
Deciding on a mortgage will be contingent on how long you plan on actually living in the home. Is this your first home you’re financing? Will this serve as your primary residence? Do you plan on flipping the home for profit?
If you’re planning on flipping a home than there are hard money and fix and flip loans designed to make a quick profit If this is your first home and you plan to upgrade in the future than consider a short term loan.
Age will play a major factor. If you're 25 than you can pay off a 25 year loan well before you retire. On the other hand, if you're 50 and purchasing a new home then you’ll still be in debt by your retirement, although you can cosign with a child or family member.
There’s also the potential to renegotiate a loan if it’s owned by Freddie Mac.
Obviously, financials and your monthly disposable income will play a major factor in determining the right loan for you. Your monthly interest rate will be determined by your credit rating, the lender, and also the length of the loan. A longer loan will result in shorter monthly payments, but cost more in the long run through interest and longer amortization.
Short term loans will come with higher equated monthly installment (EMIs) or payment. But you’ll save money in the end by not paying as much in interest.
Short term loans also generally come with a lower monthly interest rate. This means you save even more money over the long-run.
This will mainly come down to a balancing act between savings and monthly income to determine the right loan for you. Obviously a higher down payment means you’ll take on less debt for your purchase and means you will have lower monthly payments for both short term and long term loans. You need to evaluate how much this will impact your total savings and how much in debt repayment you can take on a month through different down payments.
Beyond this, most lenders will require a high down payment of up to 20%, although HOA loans can be taken for a small down payment of around 2.5%.
There is also leverage or financial instruments you can use to shield yourself from debt. Consider how much in tax credits and itemized deductions you can make for a mortgage purchase each year to save money on your investment.
ARM or Fixed?
Finally, you need to decide between an adjustable-rate mortgage or a fixed mortgage loan. Fixed loans provide security as you’ll know exactly how much you need to budget for each month. ARM loans will adjust after a certain entry period with current market trends. This could mean that after adjustment you could end up paying more or less in interest depending on the market. Of course, this comes with a lower upfront interest rate, especially for shorter initial terms.
Which is Right?
Short-term loans are preferable because they come with a lower interest rate and you pay your debt off faster. This ultimately comes down to what you can afford. Consider using a mortgage calculator to determine how much you can afford in monthly installments and which loan is right for you.