December 23, 2021
If paying off your home loan as fast as possible is a top priority, consider a 10-year fixed mortgage. When rates are high, 10-year mortgage payments will be too much for most borrowers’ budget. But, when rates are low, the monthly payment is much more manageable. Read on to discover more about this little talked about home loan.
What is a 10-year fixed conventional mortgage?
You’ve probably heard of 30-year and 15-year mortgages. But few borrowers are aware of the shorter 10-year term. Most credit unions and banks offer them, but sometimes you have to ask.
With all fixed mortgages, your rate will remain constant for the term of the loan. So, it’s similar to a 15-, 20-, and 30-year fixed mortgage, but the term is shorter.
Mortgage Terms & Financial Planning
Home loans with a shorter-term —impact your payment and monthly budget. But if you want to pay off your loan ASAP — although the payment can be much higher, it can be worth selecting a 10-, 15-, or 20-year loan.
Some borrowers decide to bite the bullet and pay more now so they can retire without a mortgage, have more money to get their kids through college, or travel.
Here’s an example of the payment difference for a $200,000 loan refinance for a borrower with good credit (score 700 – 739). Of course, rates change all the time, but this can give you an idea of how the term affects the payment.
- 10-year fixed mortgage — 2.13% monthly payment $1,852
- 15-year fixed mortgage — 2.13% monthly payment $1,299
- 30-year fixed mortgage — 2.88% monthly payment $830
As you can see, the shorter the term, the larger the payment. Now let’s look at amortization.
What is an amortization schedule?
An amortization schedule illustrates your loan payments over time until the loan is paid in full. It shows the principal and interest amount in each payment.
With a fixed-loan mortgage, your payment amount will be the same. But the amount that goes towards interest and principal will vary.
At the beginning of the loan, the majority of your payment goes towards interest. Later on, more of your payment goes towards the principal, which helps you build equity faster.
10-Year Amortization vs. 15-Year & 30-Year
When you’re comparing loans, one of the best ways is with an amortization calculator. Sometimes you don’t have a choice in reducing the term of your loan — especially if you’re a first-time borrower. You just want to buy a home, and although you can qualify for a 30-year loan, a shorter-term would make your payment too high.
But if you have extra income and want to pay as little interest as possible and build equity quickly — an amortization schedule shows you the difference between loan terms.
Here’s an example of a $200,000 refinance and how much interest would be paid over time if you kept the loan for the entire term.
- 10-year fixed-rate mortgage @ 2.13% will pay $22,232 interest
- 15-year fixed-rate mortgage @ 2.13% will pay $33,824 interest
- 30-year fixed-rate mortgage 2.88% will pay $98,915 interest
As you can see, the term affects the amount of interest you pay. If you can’t shorten your term right now, it can still be a goal for the future.
Bi-Weekly Payments Can Save You Money Too
The other thing you can do is instead of making one monthly payment is to make bi-weekly payments. That equals 13 payments per year instead of 12. Doing that is an easy way to shave off a chunk of interest. So, you don’t always have to refinance to save on interest.
Or, if you come into some extra money (like a tax refund or bonus from work), you can always pay extra on your principal.
Pros & Cons of a 10-Year Fixed-Rate Loan
Here are some of the main advantages:
- You’ll pay less interest
- Your loan will be paid off sooner
- You can retire without a mortgage
- Once the loan is paid off, you’ll have more money each month
- When the loan is paid off, you’ll own your home
- Your home equity builds faster
- The interest rate is lower than loans with longer terms
- Once the mortgage is paid off, you’ll only have taxes and insurance
Now let’s look at the disadvantages.
- You’ll have less money each month
- You’ll be committed to higher payments
- There will be less interest to deduct on your taxes
- You may have less for savings for emergencies
Compare a 15-year to 10-year Mortgage Loan
Of course, your monthly payment will depend on your loan amount. So, if a 10-year payment is too high, take a look at a 15 or even 20-year option. When you decide to reduce the term, you’ll be saving thousands of dollars in interest.
Just like with any fixed-rate mortgage, keep in mind that although your rate stays the same, your homeowners' insurance and taxes could increase. So, take that into account.
When isn’t a shorter-term smart?
If you have a lot of high-interest debt, the best way to save immediately is to pay that debt off first. Once you’ve done that, consider taking on a higher mortgage payment.
One way to pay off credit card debt faster is to get a low-interest equity line or HELOC. Then, work on paying that off as soon as possible. With a low-interest equity line, you’ll save boatloads of interest.
Once you’ve tamed that debt, consider a 10-year home loan.
Comparing Products & Services
When you’re shopping for a mortgage lender, it’s wise to compare products and services. Look at the interest rates for 10, 15, 20, and 30-year loans. Also, see what the closing costs and fees are to refinance. And if you want to lower your interest rate, even more, see what each lender charges for discount points.
When you pay for discount points, you are paying interest in advance. It doesn’t always make financial sense, but it’s something to consider and run the numbers.
Is a 10-year mortgage right for you?
If you already have a tight budget, taking on a larger payment isn’t the thing to do. But if you have disposable income, you’re looking to use in the best way possible, it could be a wise financial move.
As with any significant financial decision, only you can decide what’s best for your circumstances. But, with the help of a good lender, you can get the information you need to weigh your options and make your decision. You might also talk to your financial planner. They’ll be able to go over any tax ramifications of a shorter-term loan.
Being financially conservative and deciding to pay your mortgage off sooner is commendable! And planning ahead and taking advantage of low rates is a wise decision.