Should You Consider a 10-Year Fixed-Rate Mortgage?

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Updated on Tuesday, January 22, 2019

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How long will it take to pay off your mortgage? This is a vital question to ask yourself before you enter a mortgage agreement with any lender. The term of a mortgage will have a direct impact on the total amount of the loan you eventually have to pay back, as well as the size of your monthly mortgage payments.

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Longer loan terms — such as the standard 30-year — generally offer lower monthly payments and higher interest rates than the shorter 15-year loan term. Those interest rates add up over the life of the loan, increasing the total amount you owe to your lender.

While most people select 15-year or 30-year mortgages, there is also the option for a 10-year fixed-rate mortgage. These shorter mortgages offer a variety of benefits for homeowners, as well as some drawbacks. Here’s what you need to know about 10-year fixed-rate mortgages.

What is a 10-year fixed-rate mortgage?

A 10-year fixed-rate mortgage is a loan that maintains the same interest rate and monthly payments over the course of 10 years. Often, 10-year fixed-rate mortgages are offered with lower lifetime interest rates. However, because the loan term is shorter, homebuyers who choose a fixed-rate mortgage should also expect to make higher payments each month.

A range of lenders offer the 10-year fixed-rate mortgage as an option during the homebuying process. These are usually the shortest term available for a home loan.

Advantages of 10-year fixed-rate mortgage

There are many benefits of choosing a 10-year fixed-rate mortgage over longer options.

Lower interest rates
The interest rate on a 10-year fixed-rate mortgage is usually lower than the interest rates on 30-year fixed rate mortgage. When you have a lower interest rate, that means more of your monthly payments go toward paying down the principal of the loan, rather than chipping away at the interest as it accrues.
Pay off the loan more quickly
If you sign up for a 10-year loan rather than a 30-year loan, you’re agreeing to pay off the total sum of the loan over a significantly shorter amount of time. This means paying less interest over time and ending monthly mortgage payments decades earlier than with other loans.Even if we say the 10-year and 30-year loans offer the same interest rate (5%), the total interest you’ll pay on a 10-year term is $40,918. For a 30-year mortgage, it’s more than triple that amount: $139,884. For a 15-year loan it’s $63,514.

Build equity
By paying off a mortgage more quickly with a 10-year fixed-rate mortgage, you can build home equity more quickly than you would with a longer term loan. Home equity is the difference between the market value of your house and the amount of debt you owe on that property. The more quickly you pay off your mortgage, the more quickly you’ll build equity.

Disadvantages of the 10-year fixed mortgage

Just as there are advantages to signing up for a 10-year fixed-rate mortgage, there are also some disadvantages to keep in mind.

Higher monthly payments
How do you pay off hundreds of thousands of dollars over the course of 10 years rather than 30? By making higher monthly payments. As stated above, a larger chunk of these high payments will go toward paying down the principal on the loan, but either way the result is still the same — a higher mortgage bill each month.For example, if you were able to secure a 30-year, fixed interest rate of 5% on a $150,000 mortgage loan, your monthly mortgage payments would come to $805.On the other hand, if you agreed to a 10-year loan with the same fixed interest rate of 5% on a $150,000 home mortgage, your monthly mortgage payments would come out to $1,591, nearly double the payment you’d make with a 30-year loan.

For comparison’s sake, let’s look at a 15-year loan with the same terms. On a $150,000 home, your monthly payments would be $1,186.

May limit home purchase and affect your budget
Significantly higher mortgage payments each month may have an effect on the kind of property you can afford. It’s important to consider not just your current monthly budget, but also take into account any potential changes in income or unexpected life events that may arise over the next 10 years. If you lose your job or need to make major repairs on a property or car, will you be able to afford your higher mortgage?

If you’re looking to shorten the term of your mortgage but are hesitant to commit to a 10-year fixed-rate mortgage, you may want to consider a 15-year fixed-rate mortgage instead. You can think of it as a compromise between the 30-year loan, with its lower monthly payments but higher interest rates, and the 10-year loan, which comes with higher monthly payments and lower interest rates.

A 15-year fixed-rate home loan still offers lower interest rates than a 30-year loan, allowing you to pay off the loan more quickly while worrying less about being able to make your monthly mortgage payments during the entire term of the loan. In fact, when we checked 15-year loan rates on January 16, 2019, they were the same as or even lower than those for a 10-year mortgage.

For whom does a 10-year fixed-rate mortgage work best?

Before deciding on the term of your mortgage, be sure to take into account the advantages and disadvantages of selecting a 10-year fixed-term mortgage for you. The 10-year fixed-rate mortgage may be a sound option if you:

Are approaching retirement
If you’re approaching retirement with a steady income, the 10-year fixed-rate mortgage may be a good choice. This may be ideal for those looking to close out their mortgages sooner rather than later. However, it’s vital that anyone considering this loan be prepared for retirement with a healthy retirement fund. Those considering a 10-year mortgage should ideally be approximately 10 years from when they plan to retire.
Have a very steady income
Because the 10-year fixed-rate mortgage requires higher monthly payments, it’s crucial that you be able to afford these higher rates for the entire life of the loan. To ensure you’ll be able to keep up with high mortgage payments, you should have a high, steady income and robust savings.

Don’t have other significant debts
If you currently have a high amount of credit card debt or other high-interest debts, the 10-year fixed-rate mortgage may not be the right choice for your household. Instead, examine whether an aggressive plan to pay down those debts first might be a better choice.

On the other hand, if you have little high-interest debt and are planning to make paying off a mortgage your top financial priority, after careful consideration, you may wish to choose this home loan option.

Conclusion

A 10-year fixed-rate mortgage presents a range of pros and cons to homebuyers and those looking to refinance their homes. Weigh your options seriously and take into account how steady your income is and whether you’ll be able to keep up with high mortgage payments. Think about your financial goals, whether that’s building equity quickly or paying down other high-income debt.

Remember, too, that there is a middle ground between the 10-year fixed-rate loan and the 30-year fixed-rate loan: the 15-year fixed-rate loan.

This mortgage offers benefits from both loan programs, including lower interest rates than a 30-year loan while still shortening the life of the loan by making somewhat higher payments that may be easier for you to maintain over the years.

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