Is a 10-Year Mortgage in Your Future?
In what could portend a growing trend in coming years, the 10-year mortgage loan has emerged as the mortgage of choice for an increasing number of consumers. Why the sudden interest in the shortest of fixed mortgages? It may be time to take a closer look at the 10-year mortgage loan and see it might make sense for you.
What exactly is a 10-year mortgage loan?
About the only thing that differentiates a 10-year mortgage from a 30 or 15-year mortgage is the length of the term; however, that is enough to produce a dramatically different outcome, which is a substantial savings in interest costs. For example, on a $250,000 loan, the total interest costs for the three different types of mortgages might look like this:
|30-year fixed at 4%||$180,000
|15-year fixed at 3.5%||$ 72,000
|10-year fixed at 3%||$ 40,000|
Pay More Now to Save More Later
Of course, to pay off a loan in 10 years means you will be making higher principle payments. In fact, the payment for a 10-year mortgage can be more than double the payment for a 30-year fixed. For example,
|30-year fixed at 4%||$ 1,194
|15-year fixed at 3.5%||$ 1,787
|10-year fixed at 3%||$ 2,414|
As you can see, a 10-year mortgage definitely poses a cost-benefit question that can only be answered with careful consideration for individual circumstances, needs and objectives.
When a 10-year mortgage loan might make sense
Choosing a 10-year mortgage over longer term mortgages can present both opportunities and challenges that must be thoroughly understood. Here are four situations when a 10-year mortgage might make sense:
If your objective is to save on interest costs
There is a difference between simply wanting to pay lower interest costs and having a clearly defined objective of how to use those savings. For many people, saving on interest costs may not provide the motivation it takes to pay substantially higher mortgage payments. However, if you have a long-term financial plan that dictates how you will specifically apply those savings to achieve an important goal (i.e., retire early, buy a second home, etc), it can be all the motivation you need.
If your objective is to retire without debt
If you’re five to ten years out from retirement, and you’re able to commit to a higher payment for ten years, it might make sense to consider the 10-year mortgage. Certainly the savings in interest costs would be a significant benefit in your retirement years.
If your objective is to build equity more quickly
With a 10-year mortgage, you can build your equity three times faster than a 30-year fixed. For some people, owning a debt-free asset brings greater financial security; and it also brings more opportunity for financing other goals, such as purchasing a second home or buying a business.
If you have the financial resources
If you are in your peak earning years or you are a dual income family, it may be worth considering. As part of the cost-benefit analysis, you have to consider whether it’s the best use of your discretionary income – or would you be better off investing it? You also have to consider the possible risk of a change in your financial circumstances.
While most of the new 10-year mortgages are being purchased by pre-retirees, borrowers of any age who are looking ahead can reap significant benefits in long-term cost savings, which can be converted to long-term asset growth. Regardless of your age, there’s no better feeling than living in a mortgage-free home.
By: Richard Best
Writer For: Easy.Credit