You can never be too rich or have a mortgage that’s too short.
Although most homeowners looking for a new loan consider 15 years to be the shortest possible mortgage, it isn’t. Some lenders will give you a fully-amortizing loan that requires your entire debt to be repaid in as little as eight years.
The Benefits of an 8-Year Mortgage
You won’t get a dramatically lower interest rate by opting for a super-short home loan. Lenders charge about the same as they do for 15-year loans. If you can afford the outsized monthly payments, it works like an enforced savings plan with a big payoff at the end — owning your home free and clear. That kind of commitment makes particularly good sense for homeowners who are close to retirement and don’t want to worry about a loan payment after they quit working.
If you’re considering a reverse mortgage to supplement your retirement income, you’ll have to pay off your existing home loan before you can qualify. Although 8-year mortgages are widely available in Europe and even Canada, you’ll have to hunt around to find them in the United States.
We’ve recently seen Quicken Loans offering super-short loans, as well as some smaller lenders. A Connecticut credit union, for example, was recently charging 3.99% for an 8-year loan with no points — which was actually a little bit more than the 3.875% it was charging for a 15-year loan with no points.
Let’s say you wanted to pay off a balance of $100,000 on your home. With an 8-year loan, the monthly payments for principal and interest would be $1,218. You can use our mortgage calculator to figure out the monthly payments for any fixed-rate loan. Over the life of the loan, you’d make 96 payments totaling just under $117,000, of which just $17,000 is interest.
If you borrowed the same $100,000 with a 15-year, fixed-rate loan from that credit union, the monthly payments would be just $733, or nearly $500 less. It would take another seven years to repay the loan and cost $33,000 in interest, or $16,000 more than with the super-short loan.