If you expect to pay off your mortgage loan only two years after taking it out, your goal should be to find a loan with the cheapest overall cost. Although few people plan to hold their mortgage for only two years, the industry average for mortgage payoff is currently a little over four years. While that number is driven partially by refinance activity due to unprecedented low rates, it is still lower than most would expect.
Short-Term ARM Loans
Adjustable-rate mortgages offer the lowest interest rates in the mortgage market. These ARM loans have an initial fixed term, usually three, five, seven or 10 years, with annual adjustments thereafter. The rate for a three- or five-year ARM is typically about 1 percent lower than a 30-year fixed-rate loan. If you only plan to hold your loan for two years, a three-year ARM loan would be perfect for you.
If your goal is to keep the monthly payment as low as possible, you should look into an interest-only loan. Interest-only loans typically have more stringent qualification requirements than other types of mortgages. ARM plans also exist for interest-only loans, but often not for as short a period of time. If your shortest interest-only option is a five-year ARM, compare the rate and payment with a three-year ARM with principal and interest payments. It might be worth paying a little extra to have the lower rate. The additional payment amount each month will go straight to the principal on your loan.
Avoid Points or Origination Fees
If you are only planning to hold your loan for two years, make sure you are not being charged points, also called origination fees, for the mortgage. A point is 1 percent of your loan amount paid upfront to obtain a lower rate. While this does lower the payment, you will not be holding the mortgage long enough to recoup the upfront cost in the cheaper payment. Ask your lender if it offers rebate pricing. This is the opposite of paying points. You accept a higher rate and receive a rebate to cover some of the upfront closing costs such as title, settlement and appraisal fees.
Have a Contingency Plan
There are a number of reasons why you might expect to pay off your mortgage in only two years. Perhaps you expect a job transfer and will need to sell. Maybe you plan to remodel your home and refinance once the value increases. Maybe you expect an improvement in your credit or income that will allow you to refinance to a lower rate. But whatever the reason, it would be smart to think about what might happen if you need to carry this mortgage for a longer period of time. If you take an interest-only loan, what will the payments look like once they change to principal and interest? On an ARM loan, what would happen to your payment if the rate increases when the first adjustment arrives? By proactively preparing for all the possibilities, you will avoid a financial headache if your plans or outside circumstances change before you can complete your two-year plan.
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