Smarter mortgages are getting more research as buyers are looking for ways to cut down their loan period or payments. Financing is always a challenge in real estate and often the mistakes come when buyers are looking for the perfect loan for right now, instead of the perfect loan for the property. Yes, you can buy a home and hold it for less than five years and still turn a solid profit. Is it ideal? For some and in some areas it may be. However, that will not always be the case and if you bank everything on a short-term loan, it could mean that you have to leave yourself with reliable options on the long-term if things do not go as planned.
The idea of a shorter mortgage is that you can get the entire loan paid off faster and with less of your money going towards interest. This works well in some cases but ideally for most, a regular loan becomes the best option, even for most investment type properties. However, that brings up a good example of where you may benefit from a shorter loan. Investment properties may be a good idea to combine with this type of mortgage because if the property produces well, you can pay off the debt faster and with less interest. You also get the added benefit of a lot of your finances being tax deductible which comes in handy, especially if you are making a solid profit on the property each month.
Benefits Of Shorter Mortgages
Things are different than they were a decade ago. Now, almost every homeowner can turn their house into a rental property and make thousands of dollars a month between full-time renters and short-term renters. That opportunity has led to more aggressive home purchasing as investors now see a way to generate fast money on the home, without having to look for the perfect renter to stay long-term. Shorter renters also pay more per week, meaning you increase your profit margins and can cover higher mortgage payments. Loans that are stretched out 10 years compared to 30 will have higher monthly payments, but obviously the advantage is that you get to have them paid off in less time.
Yes, you do save a lot of money with short mortgages, especially when it comes to paying the interest. It gives you the opportunity, especially with an investment property, to potentially keep monthly payments low and hit the loan hard with principal payments during the term. The longer you can keep this up, the faster you can pay off the debt and the more you can save.
Why They May Not Be Right For You
Shorter loans mean higher payments for each month. If you are looking at a mortgage that’s going to be $3,000 a month and you can only see your property generating half that in rental value, you have to be aware that the other half needs to be covered each month. Naturally, extending the loan longer, even three times as long as originally planned, will drastically reduce the monthly payment, but increase the amount of interest you are paying over the course of the debt.
By going with a shorter debt window you are actually putting more responsibility on yourself and the property to produce immediate results. Longer deals tend to give you more time to get sorted out and determine the best course of action to take. Because the property could become a long-term investment as well, the longer the debt is laid out, the easier it will be to turn a profit each month.
Benefits Of Longer Mortgages
There’s even more you should know about the benefits of getting a longer mortgage, especially when you are looking to invest long-term in a property. Not only does it make your monthly payments lower, but it gives you a chance to pay off the loan by focusing on the backend of the plan. For example, by paying $200 a month extra towards the principal, you are actually taking 10 or more years off the backend of the loan. So, if you were able to do that every month, you would have a 30 year mortgage paid off in less than 20, cutting back on not only the term, but the interest you will pay overall. Spreading out the debt can also lower the monthly payments, making it easier to borrow more money against the property if repairs are needed.
In some cases a property appeals to you because it’s in your price range meaning that you are able to buy it but it needs work. In order to cover the cost of that work, things like roof repair or new windows, you may need to take out a second loan. If you need to do that, the lender will compare the monthly payments of the second loan with your mortgage. The lower those monthly payments are, the more you can borrow to make your repairs. That’s why inflating the monthly payments with a shorter loan may not be idea.
Don’t Overthink Your Loan
In reality the smart thing to do is work with your lender and determine which option for you is best based on the property, your income, what you are putting down and so forth. There are a lot of things to consider and the better equipped you are to make the right decision, the happier you will be. Go over the options with your realtor as well and remember that the longer you invest your time into researching the 10, 20 and 30 year options, as well as other mortgage options that are available to you, the more confident you will be in your decision.
It’s difficult to know what the market will do in five years or ten years, let alone 30 or more. That’s why stretching out the loan can make a world of difference for you as far as the monthly payments. Yes, it means you are committed to the debt longer, but it actually gives you more options in the short and long-term. Those are the advantages and things you should consider but because every property and deal are different, it’s great to have options.
