What is a 10-year Mortgage?
Across the United States, 63% of homes have an active mortgage. Some of those mortgages are 10-year mortgages with a fixed-rate option. This option carries some differences from adjustable-rate mortgages. Consequently, the differences allow a 10-year option to suit some buyers who don’t want a monthly expense for the next few decades. Choosing this mortgage type is often the case for many nearing retirement age. In addition, the mortgage may include benefits such as:
- Lower interest rates
- A quicker path to building equity in a home
- Securing homeownership faster
- Savings on interest that is then reinvested elsewhere
For buyers who anticipate selling their home or refinancing the mortgage before the ten-year mark, there are also 10-year adjustable-rate mortgages. These loan plans are suitable for borrowers who qualify and have benefits and drawbacks. We delve into both columns below.
How is a 10-year Adjustable-Rate Mortgage Different?
Many borrowers have a plan in mind for their money that makes a 10-year ARM suitable—having a sizable retirement fund may lend itself to borrowers who accept a higher monthly expense with this home loan. In doing this, borrowers will secure a lower interest rate. This trade-off is generally the difference for 10-year ARMs. The shorter option provides a faster path to equity than a longer-term mortgage. However, it achieves this by way of an increase in monthly payments.
Some in the market know that they will refinance or sell their home before the end of the 10-year term. This reality makes an adjustable-rate mortgage a viable option for those borrowers. But, again, the principal portion of the payment is higher, which most will need to consider before choosing this option. Knowing if these terms fit your financial circumstances is vital to determining if you can afford a 10-year mortgage. Finally, it’s important to remember that most ARMs are over a 30 year period. Be sure to discuss the options with your lender.
Refinancing a Mortgage into a 10-Year Option
Current homeowners who have their sights on an early payoff of their home loan may consider if a 10-year term is proper for them. Refinancing to a lower interest rate on an existing mortgage, combined with a condensed repayment term, can speed things along. Homeownership can be fast-tracked with this method, which appeals to many homeowners.
As home value increases and in the case of lower mortgage rates becoming available, a refinance option is a valuable one. Meanwhile, nearing retirement or looking to own your home sooner, make a shorter-term loan a worthwhile consideration. Closer consideration of your budget will be crucial to consider a 10-year home loan option, even with the lower interest rate.
Qualifying for a 10-Year Mortgage
If their financial picture supports the approval, lenders can qualify a borrower for a 10-year fixed-rate mortgage. Therefore, a sizable down payment and a reliable income to help the higher monthly payment will be essential. Credit ratings also consider the 10-year home loan, just like any other mortgage option.
Lower interest rates come with a fast track to home equity and a monthly payment multiple times higher than a 15 or 30-year mortgage. Qualifying means a supporting income might need to extend beyond your regular salary. If you have additional benefits from service in the armed forces, investment income, or alimony payment, these can help with qualifying.
Ensuring your resources are not spread too thin is a must. For example, having more house than you can afford in favor of low-interest rates is not best for your financial planning.
Requirements for a Mortgage
Lenders will often require a variety of information through a few critical factors. For example, lenders will look at credit scores to determine your creditworthiness. In addition, as mortgages, or home loans, are generally sizable, a lender will want to see that you handle and manage credit, and its repayment, responsibly.
Looking at the equity of your existing home is also a possibility. In addition, lenders will want to see your debt-to-income ratio. Verifying your liquid assets also ensures the amount disclosed for a down payment is accessible.
Investing additional payments on a 30-year mortgage can be an option that captures the savings of a shorter-term mortgage for those with no prepayment penalties. Separately from the requirements of financial institutions are the personal requirements of home buyers. For example, a fast track to homeownership and equity requires a degree of discipline to maintain those higher payments, and with savings on interest, invest dollars wisely.
Favorable 10-Year Mortgage Rates
Historical data is not yet on the side of 10-year mortgages. While some promising instances of a 10-year fixed mortgage rate at 2.99%, these home loans are not a broadly sought-after option. The best rates will be the ones that suit your financial circumstances and goals. The rates will also vary depending on your qualifications.
However, some data for a 15-year mortgage may give you a ballpark idea of what is most favorable. 8.69% was the average rate in 1991, but the early 2010s saw that rate swing below 4%. Historical lows at the end of ’20 for 15-year mortgages did touch 2.1%. 10-year mortgage rates should generally be lower than this.
Current rates are still low on the heels of 2020s record lows.
Other Loan Options besides a 10-Year Mortgage
A 15-year fixed-rate mortgage may be a solid alternative to a 10-year mortgage. Falling between the conventional 30-year mortgage and the 10-year home loan means a more manageable monthly payment while still carrying savings on interest. This option can work for lenders with no prepayment penalties if your funds support extra payments.
Alternatively, a Federal Housing Administration (FHA) loan is also suitable for some buyers who may not have that perfect credit score but want something between a 30-year and a 15-year fixed-rate mortgage. Additionally, these often include the benefits of lower closing costs, an easier time qualifying with less optimal credit ratings, and down payments as low as 3.5%.
10-Year vs. 30-Year Mortgage Rates
The differences between mortgage options on-paper show how stark the contrast can be to buyers.
While interest is at historic lows, the 10-year mortgage carries a 2x monthly payment compared to the 30-year. This case is mild considering that 3x the monthly rate is not uncommon in markets with fewer shifting components. Saving substantial amounts of money for retirement or other long-term investments is wholly possible with a 10-year mortgage. However, regular payments are something potential borrowers cannot overlook.
Should you Choose a 10-Year Mortgage?
Paying off your mortgage faster is a tremendous advantage. On the other hand, there is a barrier of entry to this mortgage option in the form of robust funds. As a result, the payments are exceptionally high, leading to more significant equity sooner.
After reviewing what the rates work out to and weighing your ability to stay prompt on payments, carefully consider if a 10-year option would be better in the years ahead. As your income increases, your savings and investments might as well. Investing in your home and building equity in the way that suits you best can help you secure your financial future. Securing your freedom in later years begins with a plan clarifying how you want to live your life and how best to make it affordable.
