In times like these homeowners and homebuyers are left trying to determine what is the ideal mortgage term in 2024? With many economists predicting rates going down you may be thinking of taking a shorter term. But is that the right strategy for your mortgage?

The real benefit to taking a shorter term such as a 1 year, 2 year or even 3 year term is that you aren’t under contract for as long of a period. So if you are planning to move in 3 years or less you wouldn’t necessarily need to break your term to do that. As we all know breaking a term early can lead to costly penalties. But does taking a shorter term have benefits for being able to take advantage of lower rates?

What is the risk with a shorter term?

The problem with going with the short term strategy if you think rates are going to drop is you are essentially attempting to time the market. Lets say you go with a 2 year fixed closed term. You take this term because you believe rates are going to drop in 2 years. If they happen to drop at the time of your mortgage maturing in exactly 2 years then great! You’ve just successfully timed the market. Win! What happens though, if the rates drop after only 1 year? You want to be able to take advantage of those lower rates but you are still locked in for 1 more year. Now you either have to keep your mortgage as is and hope those lower rates are still available in 1 more year or you have to pay a potentially large penalty to break the term and be able to get those new rates.

It is not necessarily bad to take a shorter term but timing the market is extremely difficult to do and you are limiting your ability to jump on lower rates at anytime. The other downside is that typically rates on a shorter term are higher than a longer term. If rates don’t drop enough in those first years you may not have saved anything at all.