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Written By: Pamela Boykoff
We're excited to share that we were recently featured in a LendingTree article! The 10-Year Fixed Rate Mortgage, was written by Pamela Boykoff and covers the advantages and disadvantages of 10-year mortgages and considerations for people who may want to choose this kind of loan. Our President, Mychal Eagleson, was quoted and spoke with Pamela on how 10-year mortgages can be good for people in their 50's working to eliminate debt before retirement and how it's probably not the best option for younger borrowers. A big thank you to Beth for including us in this piece!
When buying a home, one of the key decisions every borrower must make is how long they plan to pay the mortgage. Most lenders offer loans with repayment schedules ranging between 10 and 30 years. While 15- and 30-year mortgages are the most common, the U.S. Bureau of Labor Statistics found that almost 10% of people surveyed between 2004 and 2014 had fixed mortgages of other lengths. There are many factors to consider when contemplating a 10-year mortgage, including interest rate and monthly payment size, and your particular financial situation.
The 10-year fixed-rate mortgage
A variety of lenders offer a 10-year fixed interest rate mortgage, typically their shortest term available. These mortgages are typically repaid over 10 years on a schedule of regular, equal-sized payments. The relatively short window means that monthly payments tend to be high, but interest rates are among the lowest available for any fixed-rate loan.
For example, let’s say you need to borrow $300,000 to buy that house you’ve been eyeing.
Loan A is a 30-year fixed with a 4.5% interest rate. Every month, your payment will total $1,520.06. Over the course of the loan, you’ll end up paying the bank $547,220.
Loan B is a 10-year fixed with a 4% interest rate. Each month, you will need to pay $3,037.35. That’s significantly higher than Loan A’s payment. But over the life of Loan B, you’ll end up paying the bank $364,482, a difference of almost $183,000.
Despite the savings appeal and availability through many banks, credit unions and online lenders, the 10-year fixed appeals to a limited number of borrowers. Many people can’t afford to be locked into the high monthly payments. Mike Hardy, California regional manager for Churchill Mortgage, estimates around 3% of his clients over the last decade opted for a 10-year fixed.
If you think this type of mortgage might be the right fit for you, speak to lenders. They can advise you and they’ll check if you qualify based on the ratio of the debt repayments to your monthly income.
Advantages of a 10-year fixed mortgage
The biggest financial advantage of the 10-year fixed is that the borrower pays less in interest over the course of the loan. This is both because of the shorter duration of the mortgage and the lower interest rate. These savings can total tens of thousands of dollars when a 10-year is compared with a 30-year mortgage.
Consider a 15-year mortgage instead.
However, lenders caution that the advantage of a 10-year mortgage over a 15-year mortgage is often quite small. According to Hardy, the interest rate difference between the two often comes down to an eighth of a percent. When they see how small the difference is, many of his clients opt for the added flexibility of the 15-year instead.
But many people dislike debt and prefer the freedom of no longer having a mortgage. “What would be appealing about the 10-year is really just moving to a place of being debt-free as quickly as possible,” said Hardy.
Prepayment penalties for a 10-year mortgage are rare, so buyers with lots of cash may even have the option to become debt free ahead of schedule .
It’s also a way to build up your equity really fast. “For a $225,000 mortgage, the balance after 10 years on a 30-year loan is approximately $180,000,” Daniel Jacobs, executive vice president of national retail lending at MiMutual Mortgage, told LendingTree. Compare that with the 10-year fixed mortgage, where you’d already be debt free.
Disadvantages of a 10-year fixed mortgage
The most challenging part of having this sort of mortgage is the high monthly payment. With a fixed 10-year, lenders will want to see that you have the capability to make the payments, including a debt-to-income ratio of about 20%, a good credit score and an excellent savings record.
“This loan is not for everyone,” said Jacobs. “It is best for a person with extremely reliable income and strong savings. “
Even if you sign up for a 10-year loan with the best of intentions, both financial advisers and lenders warn that a disruption of income or unexpected life event can throw you off course. There is always a risk you’ll find yourself not being able to afford the payments somewhere down the line. Hardy believes 15-year mortgages provide more “wiggle room” in case things go off track.
Another risk: An adverse financial event that would make it difficult to meet the high payment could at the same time make it difficult to refinance should you decide a 10-year mortgage isn’t right for you after all.
Who does a 10-year fixed mortgage work best for?
Several financial advisers said a 10-year-fixed is often a good fit for people approaching retirement. At the peak of their careers, older workers often have high, reliable income and they want to clear the mortgage before they stop working.
Mychal Eagleson, a financial planner and president of An Exceptional Life Financial, gives an example. He has a client in his early 50s who wanted to pay off his house before retirement. A raise at work helped him refinance to a 10-year mortgage without impacting his monthly budget.
“Now, he’s able to look forward to retiring with the house paid off,” Eagleson said.
Another client was in her 80s but still had a strong income. She wanted to pay off as much of the mortgage as possible so her heirs wouldn’t be forced to sell the home.
Eagleson does not feel that 10-year mortgages are a good fit for younger borrowers. They still have an uncertain financial future and things like starting a family could divert them from the strict repayment schedule, he said. They also aren’t a good option for those with fluctuating or unstable income.
Jacobs believes steadiness is a key qualification for this type of mortgage. Good candidates have a consistent salary, have been in the same job for more than 10 years and have confidence they won’t have any sort of career disruption. This has to be paired with motivation; a borrower who sees paying down their debt fast as a primary goal.
If you are considering a 10-year-fixed, but aren’t sure it’s a good fit, there are a couple of alternatives to consider.
Make extra payments. You could get a longer term mortgage with no prepayment penalty and repay it quickly. Jacobs recommended taking a mortgage with an amortization of five to 10 years longer than you really want and then setting up autopay that’s above your required payment. You’ll need to talk to your lender to let them know you want the additional money to go straight to the principal and to check for any pesky prepayment fees. With this approach, you’ll shorten the term of the loan and lessen your total interest, but you won’t lose flexibility if the unexpected happens.
“My risk tolerance is very low. I’d get a 30-year and make extra payments,” said Mark Kraft, the regional mortgage manager for Colorado and Utah at US Bank.
This approach takes discipline though and so isn’t a good fit for every borrower.
“There is the math and then there is real life,“ said Hardy.
Consider an ARM instead. A second option is a 10-year adjustable-rate mortgage, known as a 10-year ARM. This is a mortgage that has a low, locked-in interest rate, but then changes to an adjustable rate that is updated once a year. If you plan to pay your mortgage off in 10 years, you may actually be able to secure a better 10-year interest rate with a 10-year ARM than with a 10-year fixed, suggested Mike Hardy.
WIth a 10-year-ARM you will also have the added flexibility to change your 10-year plan and slow down your payment. However, the risk is that the interest rate — and thus your monthly payments — could jump dramatically after the 10th year. Hardy said subbing a 10-year ARM for a 10-year fixed only makes sense for sophisticated borrowers.
Another factor to consider when choosing the length of your mortgage is the impact on your taxes. With a 10-year fixed you’ll pay less interest, which will lower the size of your potential mortgage interest deduction.
The bottom line
With a 10-year fixed mortgage, you are trading flexibility and a more affordable monthly payment for low interest and fast reduction of debt. These mortgages are the best fit for those who are about 10 years from retirement and have a high and steady income. At the end of the day, emotion plays a big role in choosing a mortgage with such a short, fixed repayment schedule. It is ideal for those who don’t want to carry debt and want a strict repayment schedule to motivate them to reduce it fast.
*This article was written by Pamela Boykoff and originally published in LendingTree here.
If you have any questions or would like help figuring out what the best options for your mortgage are, don't hesitate to reach out.