Everybody's heard of the 30-year home mortgage, and probably the 15-year mortgage, too. But did you know that there is a 10-year, fixed-rate mortgage? And for some, it can offer big advantages.
Those advantages include lower interest rates and enormous savings in the amount of total interest paid over the life of the mortgage, says Jim Duffy, a mortgage banker with Cole Taylor Mortgage in Atlanta, Georgia. But, he adds that because you are paying the principal of the mortgage down in a third of the amount of time you would a 30-year mortgage, the monthly payment will be higher.
"Still, they have become more popular. I've done more 10-year mortgages in the last year than I've done in 10 years prior," says Duffy.
Here are four reasons why that trend may catch on.
#1 - The Interest Rate on a 10-Year Loan is Much Lower (Compared to a 30-Year Loan)
If you're like most people, you refinance your mortgage for one main reason: to save money. So understandably, people usually focus on how their new interest rate will affect their monthly payment, says Duffy.
But focusing on the monthly payment alone can be detrimental to your wallet. For example, even though the monthly payment on a 30-year mortgage will typically be much lower than with a shorter-term loan, the interest rate will be higher. So, you'll end up paying a lot more over the life of the loan in interest on a 30-year mortgage than you will on a 10-year. This is crucial to understand as the total interest, plus the purchase price of your home, is the true cost of your home, says Duffy.
So how much can you save in interest with a 10-year mortgage vs. a 30-year loan? Let's look at the average interest rates from August 13, 2013 according to PNC Bank. We'll compare a 30-year loan at an interest rate of 4.375 percent, with a 10-year loan at an interest rate of 3.125 percent, for a loan amount of $300,000.
|30-year mortgage||10-year mortgage|
|Interest Rate||4.375 percent||3.125 percent|
|Total Interest Paid||$239,228.08||$49,699.74|
The numbers speak for themselves. If you can afford the higher monthly payment, you'll save almost a whopping $190,000 over the life of their loan!
#2 - Refinancing to a 10-Year Loan Won't Reset the Clock
Traditional wisdom says that if you've got fewer than 20 or 15 years left on your 30-year mortgage, refinancing probably should be avoided. That's because refinancing to another 30-year mortgage resets the clock on your mortgage.
But refinancing to a 10-year mortgage with a low interest rate could turn that logic on its head, says Duffy. That's because most people who only have 15 or so years left on their mortgage probably have an interest rate much higher than today's historically low rates, he says. Why? Interest rates were a lot higher 15 years ago, and homeowners who haven't refinanced at all could still be stuck with these high rates.
For example, the interest rate for a 30-year, fixed-rate mortgage in January of 1995 was 9.15 percent, according to the Federal Reserve Board.
Duffy says he recently helped a couple who only had 12 years left on their mortgage refinance to a 10-year mortgage.
"[T]hey [initially] had an interest rate of over 7 percent. They refinanced to a 10-year mortgage at a little over 3 percent," which saved them tens of thousands of dollars, he says. "So it was a terrific move."
#3 - You Can Build Equity Faster with a 10-Year Loan
Do you want to move in the next few years, but can't sell your home because it's worth less than the amount you owe on your mortgage? Refinancing to a 10-year, fixed-rate mortgage through a program like HARP, a government program that helps homeowners refinance their underwater homes, is one move that has helped more than a few people in that same situation, says Duffy.
How can this help? By refinancing to a 10-year mortgage, you can build equity faster, and own enough of your home so that it’s not underwater anymore when it comes time to sell.
"I've done several 10-year loans for people who want to move in three years and the best way they can see to do it is to budget every month and pay that principal down quickly, so they do a 10-year fixed," says Duffy.
He says that the added benefit is that you can often get a lower interest rate when you refinance, and save a lot of money on interest as a result. Secondly, he adds, you could of course make extra payments without refinancing, but many know they won't have the discipline to put that money aside.
#4 - A 10-Year Loan Allows for a Stress-Free Retirement
The 10-year mortgage may be the right move if you're nearing retirement.
Here's why: For a lot of people, their monthly mortgage payment is their biggest expense. Of course, when you're working, that may not be a big deal. But what about when you retire and you start seeing a lot less income?
That payment could become quite a burden, making your sunset years not so sunny. Worse, it could force you to sell your home, or put off retirement. Duffy says that these are two major reasons he's done many 10-year refinances.
"[Homeowners are] approaching retirement, it's on the horizon, and they reason that it's better to bite the bullet and pay more in a monthly payment while they're working and producing income than still have a payment when they're retired. It's all about getting debt-free by the time they reach retirement so they can really enjoy it," says Duffy.