Build Equity Faster With An 8-Year Mortgage

If you’ve been playing around with a mortgage calculator or are looking for lower interest rates on a home loan, you may have noticed you can save significantly on interest with a shorter-term mortgage. One of the shortest mortgage loan terms you can get is an 8-year mortgage. While less popular than 15- and 30-year home loans, an 8-year mortgage loan will allow you to aggressively pay down your home loan, and, in turn, own your home outright in less than a decade. 

If you’ve purchased a home well in a price range that allows you to afford large monthly payments, the interest savings alone should be a strong reason to consider an 8-year mortgage loan.  

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What is an 8-year mortgage loan?

When most people purchase a home, they’ll need to take out a mortgage loan for the purchase. These types of loans are paid back in installments over a set period of time. An 8-year mortgage loan is simply a type of mortgage that is paid back in monthly installments over eight years rather than the typical term of 15 or 30 years. Compared to other mortgage loan term options, this type of loan has one of the fastest and most aggressive payoff plans out there.

As an added bonus, 8 year mortgage rates may be lower or comparable to other shorter-term or medium-term length loans. Regardless, you’ll save immensely with an 8-year loan term since you won’t be paying interest on the loan over 20 or 30 years. Ideally, these loans are best for buyers who can afford the larger monthly payments. If you’ve purchased a home you can easily afford to pay off quickly based on your income, you may be able to take on this more aggressive repayment approach and save a lot of money.

The benefits of an 8-year mortgage

While uncommon, 8-year mortgages offer a lot of great benefits to homebuyers who can afford larger payments. First, you’re building equity much faster with this short loan term. Longer-term loans allocate a very small percentage of early year payments to go toward principal, with most of your payments going toward interest. With an 8-year mortgage, a much higher percentage goes toward the principal from day one, which in turn builds equity quickly. This means you can capitalize on more cash when you sell and have more home equity lending options available if you need to borrow against your home.

You will also save immensely on interest over the life of the loan. When you borrow money, you only interest while you are still borrowing it. This means that if you’re able to return all the borrowed money in eight years rather than 20 or 30, you’ll end up paying much less in interest.

For example, if you look at the true cost of a $200,000 loan over 30 years at 5% vs. a $200,000 loan over 8 years at 5%, you’ll see the savings. The 30-year loan will cost you $386,511.57 in total with interest, while the 8-year loan will only total to $243,070.46 including the interest.

Pros and cons of an 8-year mortgage

One of the main benefits of 8-year mortgages is that the loan term offers an aggressive approach to paying down your mortgage loan. However, the aggressive approach does mean higher monthly payments, which might not be feasible for some homeowners. Understanding the pros and cons of an 8-year mortgage can help you decide if the shorter loan is right for you.

Pros

  • Interest savings — By choosing a much shorter mortgage term, you can save a lot on interest, as you won’t be paying interest on a loan for 20 or 30 years.
  • Build equity faster — Even if you don’t stay in the home long enough to pay off the loan, you will be building equity in your home at a lightning-fast rate. This can mean plenty of cash when you sell or extended options with home equity lending products.
  • Own your home fast — At the end of the loan term, you will own your home outright. This means that you won’t have a mortgage payment any longer than eight years, which will unlock significant cash each month for other things.

Cons

  • Higher payments — The payments you make each month on your mortgage will be significantly larger than they would with other loan terms because you are paying off the full loan in only eight years.
  • More risk — You need to make sure you can maintain high monthly payments for the life of the loan. If you find that you can’t make the payments, you’re at just as much risk of defaulting as someone with a 20- or 30-year loan.

How to build equity fast

Building equity in your home brings you closer to being the outright owner of your home and also offers other benefits, like the ability to access home equity lending products. If you’re looking to build equity as quickly as possible, there are things you can do to help speed up that process.

1. Start with a shorter loan term. The shorter your loan term is, the faster you will build equity in your home. More money from each payment will be going toward your principal and building your equity.

2. Make additional payments. You can always make additional payments on your mortgage sporadically or even monthly. When you do this, make sure you instruct the lender to apply those funds directly to your principal and not toward interest.

3. Make larger payments. You can also make larger payments on your loan if you’re trying to quickly build equity in your home. Again, make sure your lender is instructed to apply the additional funds toward the principal.

4. Refinance your loan. If you already have a longer-term loan, you could look into refinancing to a shorter term if you’re trying to build equity fast. By doing so, your amortization schedule would adjust, and more of each monthly payment would be applied toward the principal.

5. Increase your home’s value. Your equity is the home value minus the amount you have left to pay on your loan. If you do things like complete renovations and upgrades to increase your home’s value, you are further increasing the amount of equity you have in your property. Many people only focus on the loan portion of the equation and not on the home’s value. Both affect your equity.

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Jason Lee

Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skillsets with the rest of the world.