Several lenders offer a ten-year mortgage as their lowest available term. This means the mortgages taken out will be paid over the course of ten years versus fifteen, twenty, or thirty, on a schedule of regular payments in uniform size.
While the payments for these loans are much higher than their traditional longer-term counterparts, the interest rates are amongst the lowest available on any fixed-rate loan in the industry.
Here is an example for the different loan options for a $300K mortgage:
Loan 1 – 30-year fixed rate with an interest rate of 4.5 percent.
Your monthly payments will be about $1,520. The total amount of your loan when interest and fees and computed in is an incredibly $547,220. That is an additional $247,220 in additional fees and interest.
Loan 2 – 10-year fixed rate with an interest rate of 4 percent.
Your monthly payments will be about $3,037. While this is much higher than Loan 1, the total amount of your loan with fees and interest rates computed only amounts to $364,482. This is $183,000 less than Loan 1, and only amounts to $64,482 in additional fees and interest.
Pros & Cons of 10 Year Mortgages
When deciding whether a ten-year mortgage is right for you, it is important to weigh the pros against the cons as they pertain to your unique situation.
The pros of a ten-year mortgage include:
- Borrower pays significantly less interest over the course of the loan
- Monthly interest rates tend to be lower by .5 to 1 percent
- Borrower will be debt free as many as 20 years sooner
- Usually no penalties for paying loan off early
- Build equity in your home quickly
The cons associated with a ten-year mortgage include:
- Very high monthly payments many homeowners will find difficult to keep up with
- Harder to become approved for, because lenders will require a debt-to-income ratio of 20% or lower, in addition to a good credit score and an outstanding savings record
- Much easier to default if an unexpected event happens, such as a medical emergency, loss of job, etc.
- Harder to refinance should you decide you cannot keep up with the high payments
Who Should Get A Ten-Year Mortgage?
Experts say these forms of short-term loans work best for people who may be nearing retirement. These individuals are most often at the height of their careers, have stable incomes, and produce substantially more income than individuals in their twenties or thirties.
Not only this but taking out such a small term loan between the ages of 45 and 55 can ensure the mortgage is paid off before retiring at age 65. With the home loan paid off, monthly recurring expenses will be significantly lower during retirement, when income will come in at a slower rate.
With a lower cost of living, retirees can potentially stretch that hard-earned nest egg further by years. This is, of course, if individuals are able to continue saving in the face of such high mortgage payments over the course of a decade.