Short-term loans rise in popularity

2/3/2014 3:46:21 PM

According to a recent report by The Wall Street Journal, wealthy homebuyers are opting for shorter-term mortgages in an attempt to reduce the overall amount of interest they will pay on a home loan. Shorter loans can typically save a wealthy homeowner thousands of dollars compared to a 30-year mortgage.

Instead of paying all cash for a property and missing out on the tax benefits from making monthly mortgage payments or completely paying off home loans, wealthy borrowers are using mortgage refinance plans to reset the terms. Homeowners with jumbo loans don't have to restart their mortgages with a refinance, but can often shorten the length of the loan with a lower interest rate, making it less expensive in the long run. Homebuyers making a new home purchase are also using the short-loan option.

The reduced loan lengths are considered a compromise between paying a cash and getting an expensive mortgage. Homeowners can still take advantage of the tax benefits while paying less interest. Reportedly, homeowners can deduct up to $1 million on their mortgage payments. While a shorter loan does mean less interest, it can also lead to significantly higher monthly payments.

Short-term advantages
Shorter-term mortgages reached the highest level in seven years at the end of 2013, the report cited. Thirty-year mortgages are still popular, accounting for the majority of all home loans, but they have begun to drop off slightly as a result of rising interest rates. Thirty-year mortgages typically have the highest interest rates compared to other loan types.

As rates rise, 30-year fixed-rate mortgages can be more expensive and harder to qualify for. In recent years, credit standards have also tightened, putting a strain on some borrowers. Fortunately, economists at The Wall Street Journal predict that credit standards will loosen in 2014. Already the market has improved with the average FICO score necessary to qualify for a mortgage dropping from 761 to 756 in December 2013.

The difference in interest between a 30- and 15-year fixed-rate mortgage can be as much as 1 percent. Depending on how many years are left on the loan, the savings can be huge in terms of interest alone. This is especially true for borrowers with jumbo loans. As rates continue to rise in 2014, shorter-term mortgages may soon increase in popularity.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about affordable mortgage options.