Short Term Loans as an Investment

When shopping for a fixed rate mortgage, you have several important decisions to make, like which mortgage company to use, what size down payment you want to make, and how many points you want to pay. Another important decision is whether to pursue a loan with a short term or a long term. This article highlights one of the major advantages of a shorter term loan.

A short term loan can actually be viewed as an investment, though it works differently than most investments. Most investments consist of the payment of a sum of money to begin with, and getting a series of smaller returns on the investment over time. This is how investing in bonds or deposits works, for example.

A short term mortgage is obviously different. Your investment consists of the money you pay out monthly above what you would pay on a long term loan. For example, suppose your monthly payments are $200 more for a 15 year loan than a 30 year loan for the same amount at the same rate. This $200 per month is your investment. In return, you build a large amount of equity relatively quickly.

You will realize a return on your investment when you decide to move out and sell your house. You will have a smaller amount of the loan left, and will receive a larger amount of the proceeds of the sale. In this way, short term loans allow you to invest in monthly payments and receive a large lump sum in return.

Your investment return will vary depending on what your interest rate is and how long you actually stay in the house before selling. Your investment return will also be greater if you made a down payment of less than twenty percent. This is because these smaller down payments require you to purchase mortgage insurance, and this insurance is cheaper for short term loans. This is yet another way short term loans can increase your return, or save you money, whichever way you want to characterize it.