If you're in the process of shopping around for a mortgage or refinancing the one you currently have, there's one mortgage option you shouldn't overlook: The 10-year loan.
But before we get into the pros and cons, it's important to first note that a 10-year mortgage is not for everyone. And anyone who chooses to take out a 10-year loan should do so with caution, as the monthly payments on a 10-year loan are significantly higher than on a 30-year loan.
"These mortgages require a monthly payment that is considerably more expensive than other alternatives," says Scott M. Lanoff, president of American Success Mortgage in Westchester County, New York. "For example, $100,000 at 4 percent over 10 years is $1,012.35 per month, compared to $477.42 per month over 30 years."
So, why would anyone ever consider a 10-year mortgage when they could spread out their mortgage over a longer, more manageable period of time? Keep reading to get the scoop on the 10-year mortgage and find out whether or not it's right for you.
Low Interest Rates
A huge benefit of getting a 10-year fixed mortgage as opposed to a 30-year fixed mortgage is the lower interest rate.
"The interest rate on a 10-year fixed mortgage is typically much lower than the rate on a 15- or 30-year fixed," says Peter Grabel, mortgage loan originator for Luxury Mortgage Corp in Stamford, Connecticut.
For example, here are the rate assumptions and monthly payments provided by PNC Bank for a purchase loan of $300,000, as of February 4, 2014:
Fixed Rate Mortgages
|Loan Types||Rate||APR's||Monthly Payment|
|10 Year Fixed||2.875% - 3.500%||3.191% - 3.321%||$2,880 - $2,967|
|15 Year Fixed||3.250% - 3.625%||3.434% - 3.484%||$2,108 - $2,163|
|20 Year Fixed||4.000% - 4.250%||4.092% - 4.155%||$1,818 - $1,858|
|30 Year Fixed||4.250% - 4.625%||4.361% - 4.535%||$1,476 - $1,542|
While these are just rough rate assumptions provided by PNC Bank - and will vary based on a variety of factors including closing costs, down payments, credit score, and more - it does illustrate a clear point: The shorter the loan type, the lower the interest rate.
Can You Afford Significantly Higher Monthly Payments?
As you can see in the example above, shorter loan terms also equate to higher monthly payments.
Now, if you're debating between getting a 10- and 15-year loan, the mortgage payments aren't dramatically different. But, if you're choosing between a 10- and 30-year loan - that difference is nothing to take lightly.
"A 10-year mortgage will consume nearly twice the amount of a person's monthly cash-flow available to spend on housing," says Ricardo Cobos, a mortgage loan officer in Cary, North Carolina. As a result, homeowner's who opt for a 10-year loan need to be certain that their income is consistent. Otherwise, they'll run into the risk of losing their home.
For example, "Someone who chose a 10-year term and then sustained a prolonged reduction of income may find themselves in a situation where they can no longer afford the higher monthly payments and thus be forced to either refinance or even sell their home," says Cobos.
Grabel agrees, adding that "the payments on a 10-year product are hefty, and more than most consumers can afford."
Are You on the Brink of Retirement?
If you can afford the high monthly payments, a 10-year mortgage could be a good option for you - especially if you're close to retirement.
"This could be an excellent choice for someone in their 50's, or anyone who plans to work for only 10 more years," says Grabel.
Bob Dorn, an associate at Prospera Credit Union in Appleton, Wisconsin, agrees, noting that having the house paid off can lead to less stress in retirement.
"This is a great product for someone whose goal is to get the mortgage paid in full prior to retirement," explains Dorn.
And if you're thinking about investing the money towards your retirement, opposed to paying down your mortgage, here's some food for thought: Banking on the stock market - especially as you near the age of retirement - isn't a sure bet. It might feel safer to know that your home is paid for, so when your income drops, you don't find yourself stretching to cover a mortgage payment each month.
Do You Want to Refinance and Shorten the Term of Your Loan?
In its 2013 Fourth Quarter Refinance Report, released on February 4, 2014, Freddie Mac reported that borrowers who refinanced in 2013 will save over $21 billion in interest payments over the coming year.
And according to their report, a good portion of borrowers will reap these savings because they refinanced to shorter-term loans. Specifically, 39 percent of borrowers who refinanced during the fourth quarter of 2013 elected to reduce their loan term.
This is a savings strategy that Cobos says is common among baby boomers.
"Most of the 10-year term mortgages that I have written lately have been for baby boomers taking advantage of the low interest rate environment by reducing their already abbreviated mortgage terms from 15- or 20-year mortgages," says Cobos.
Alternative to a 10-Year Loan
Despite all the potential benefits of a 10-year fixed mortgage, the truth is that it's not right for everyone. If your income is at all in doubt, you're thinking of switching careers, or you're worried that your job is
unstable, this might not be the right option for you.
Luckily, there is an alternative solution:"If you are unsure about being able to make this high payment, you might be better off selecting a 15-, 20- or 30-year mortgage and making payments based on a 10 year amortization schedule," advises Grabel.
While you'll pay a higher interest rate with this method, you have the ability to revert to smaller monthly payments in the event you lose your job or face some financial hardship. It's simply a safer approach for those who don't want to risk getting a 10-year term.
- interest rate