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For most borrowers, a year mortgage winds up costing too much in the long run to justify any perceived savings along the way. Many mortgage lenders allow you to pay mortgage points or discount points upfront to reduce your interest rate, which trims your monthly payment moving forward. A year fixed-rate mortgage might come with a slightly higher monthly payment, but significantly more in savings throughout the life of the loan. You might also consider a shorter-term ARM.
This could offer smaller loan rates at the beginning of your term, and as you save more and improve your credit , you can refinance into a predictable fixed-rate mortgage before your ARM resets. Overall, year mortgages can be more risky and more expensive than their more common counterparts, so carefully weigh the pros and cons as you compare options when buying a house.
How We Make Money. David McMillin. Written by. David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited By Suzanne De Vita. Edited by. Suzanne De Vita. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Reviewed by. Kenneth Chavis IV. Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity. Key Principles We value your trust. Some of these are going to be obvious.
Others, not so much. We started to touch on this a bit above, but year mortgages have their drawbacks. This happens in a couple of ways. The reasoning for this has to do with the way loan amortization works. At the beginning of your loan, more of your payment goes toward interest than principal.
Over time, this balance flips, but the longer your loan, the longer it takes for that to happen. Qualified mortgages, those that can be bought by the major mortgage investors, are limited by legal regulation to have terms no longer than 30 years. Because year loans are not subject to these rules, that means they can have all sorts of not great provisions, but here are some to be aware of.
Although this can make your monthly payment even cheaper, it may also defeat the purpose of the year loan and cause a payment shock if you have to pay the actual principal and interest payment for say the remaining 30 years. The second negative loan structure you should be aware of is something called negative amortization.
Then there are balloon payments. Finally, qualified mortgages have limits on closing costs. There are no such limits for non-qualified mortgages, so your costs can be quite a bit higher. As long as your mortgage amortizes normally, you gain home equity with each mortgage payment you make. You can think of home equity as the percentage of the home that you own relative to the value of the house. Building equity has all sorts of desirable effects. You generally have to have a minimum amount of equity before you can refinance to lower your rate or change your term.
For a year loan, after 10 years, you would have
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