Whether you’re looking to take the leap into buying your first home or looking to upsize from your current property, you’ll probably need a mortgage to purchase the home. There are lots of different variables to consider as you apply for a mortgage. Your income, debts, savings and career plans should all factor into the decision.
Not sure where to start? We suggest looking at the length of the mortgage. It will affect your finances for the next 5 – 30 years, so it’s important to make an educated choice.
We’ll look at two types of mortgages: the 30-year mortgage and the 10-year mortgage. Before we dive into the pros and cons of a 10-year fixed-rate mortgage over a 30-year fixed-rate mortgage, let’s talk about a few key terms:
- Loan term: The amount of time you have to repay a mortgage is called the loan term. Usually, banks offer loan terms ranging from 5 – 30 years.
- Interest: Sometimes referred to as your mortgage rate, this is the amount of money you pay the bank to borrow money. It’s usually referred to as a percentage of your loan balance.
- Refinancing: This is when you replace an existing mortgage with a new one, usually at a lower interest rate or for a different loan term.
When choosing mortgage rates, you have two main options: fixed-rate and adjustable-rate. What’s the difference between fixed and adjustable loan options?
- A fixed-rate mortgage maintains the same interest rate throughout the life of the loan.
- An adjustable-rate mortgage (ARM) has a fixed interest rate for a set number of years. After that, the lender can increase the interest rate (up to a specified limit) until you pay off the loan.
For this article, we’re going to focus on two different fixed-rate loan terms. We’ll examine the pros and cons of a 10-year fixed over 30-year fixed mortgage – that way, you can decide which option is best for you.
When you make a payment on a fixed-rate mortgage, the bank splits the funds between the principal and interest (plus taxes and insurance, if your lender sets your mortgage up to include them). In the beginning, most of the money goes toward interest.
A fixed-rate mortgage is predictable. Your payments stay the same over the life of the loan, so it’s easy to anticipate and budget for housing costs.
Because your interest rates are fixed, this type of mortgage insulates you against changes in the economy. You don’t have to worry if national interest rates rise – your payments will stay the same.
With a fixed-rate mortgage, you start out paying more toward the interest. As you pay down the mortgage over time, more of the payment goes toward the principal. During the final years of the loan, most of each payment goes toward lowering the principal.
This process is called amortization.
Before you sign a contract, the lender will give you an amortization schedule. It lays out every payment, telling you how much goes toward interest and how much goes toward the principal. The table also lists how much you’ll owe after each payment.
30-Year vs. 10-Year Fixed Mortgage
Simply put, a 30-year fixed-rate mortgage is paid off over 30 years and a 10-year fixed-rate mortgage is paid off over 10 years.
30-year fixed mortgage, explained
If you choose a 30-year fixed-rate mortgage, you’ll make monthly payments for up to 30 years. At the end of that period, you’ll own the home. The longer repayment term means that your payments will be smaller, but you’ll pay more in interest over the life of the loan.
If you borrow $250,000 at a fixed interest rate of 4.5% with a 30-year mortgage, you’ll pay approximately $1,267 a month toward your mortgage, not including property tax and other additional fees.
This type of mortgage might be right for you if one or more of the following are true:
- You’re on a tight budget: The lower payments are less of a burden on your finances, so they’re easier to handle when you have a lower income.
- You have credit card debt and loans: A longer mortgage term can help you buy a home while still paying off other debts.
- You’re young or buying a starter home: A 30-year mortgage gives you more financial flexibility if you’re just starting out.
10-year fixed mortgage explained
If you choose a 10-year fixed-rate mortgage, you’ll make monthly payments for 10 years. At the end of that period, you’ll own the home.
If you borrow $250,000 at a fixed interest rate of 4.5% with a 10-year mortgage, you’ll pay $2,591 a month toward your mortgage.
But typically, shorter mortgage terms often offer lower interest rates. So if you were to lower the interest rate on the 10-year mortgage to 4%, you’d pay approximately $2,531 a month, saving roughly $60 a month.
This type of mortgage might be right for you if one or more of the following are true:
- You have high income and an affordable home: If you’re earning a sizable salary and live in an area with affordable housing, you may be able to afford higher payments, live comfortably and save for the future.
- You want to build equity quickly: A short mortgage term can be handy when you want to build equity quickly. That way, if you need cash, you have the option to take out home equity loans, lines of credit or cash-out refinancing.
- You’re approaching retirement: If you’re coming up on retirement, a 10-year mortgage may also be an attractive option. In 10 years, you’ll have a paid-off asset that cuts your housing costs dramatically.
Does a 10-Year Mortgage Make Sense For Me?
Not everyone can afford $2,531 a month for 10 years, and it may make more sense for your budget to pay $1,267 with a 30-year mortgage. You wouldn’t be alone either. The vast majority of U.S. mortgages are 15-, 20- or 30-year mortgages.
However, if you can swing the higher payments, you’ll save money on interest with a 10-year mortgage.
For example, in the scenario above, with a 30-year term, your interest charges would be $206,017 over the life of the loan. With a 10-year mortgage, you’d pay less than a third of that ($60,915) in interest.
Refinancing to a 10-year mortgage
Of course, you have the option to refinance your mortgage. Let’s say you buy a home with a 30-year mortgage. After 10 years, your income has increased, your credit score has improved and you’ve paid off part of your mortgage principal.
Instead of paying for the mortgage for another 20-years, you could refinance your mortgage to a 10-year loan. You could potentially get a lower refinance rate, pay less in interest and you could own your home 10 years sooner.
At the end of the day, your financial standing and long-term goals affect your decision to choose a 10-year mortgage. This type of loan ties up your cash in the short term, but it offers lots of flexibility in the long term.
What are the Pros and Cons of a 10-year Fixed Mortgage?
Thinking about a 10-year mortgage? Here are some pros and cons to consider.
- You’ll pay off the loan three times faster: Compared to a 30-year fixed mortgage, you’ll own your home outright in one-third of the time.
- You’ll pay less in interest: This is one of the biggest advantages of a 10-year fixed-rate mortgage – because the term is short, you’ll save thousands of dollars in interest.
- You’re more likely to get a better interest rate: If you’re well qualified, lenders may offer favorable interest rates, which saves you even more.
- Payments are high: A 10-year mortgage often comes with monthly payments that are nearly double that of a 30-year term. This can put a strain on your budget and require sacrifices in other areas.
- You may have limited home choices: Because the payments are higher, and monthly payments must be less than 28% of your income, you’ll probably qualify for a smaller loan. That means you might not be able to afford more expensive houses.
- Future job changes can cause financial trouble: If you’re laid off or if you move to a job with a lower salary, you may struggle to make monthly payments.
What are the Pros and Cons of a 30-year Fixed Mortgage?
Thinking about a 30-year mortgage? Here are some pros and cons to consider.
- Affordable monthly payments: You’ll have a lower monthly payment with a 30-year mortgage. This frees up cash for activities, retirement and other investments.
- You may qualify for a larger loan: Because your mortgage payment is lower, you may be able to borrow more and buy a more expensive house.
- Bigger tax deduction: As long as the mortgage is on your primary residence, you can deduct the interest when filing taxes.
- It takes a long time to pay off your house: If you decide to sell the house before 30 years is up, you won’t have as much equity available to buy your next home.
- Higher interest rates: The 30-year APR tends to be higher than the APR for a 10-year loan.
- Higher total loan cost: You’ll pay interest for 30 years rather than 10, adding thousands of dollars to the total cost of the loan.
Deciding Between a 30- or 10-year Mortgage
Whether you’re buying a new home or refinancing your existing mortgage, it’s important to choose a repayment term that’s right for your financial situation.
A 10-year mortgage may be a good idea if you have a high income and a stable career. It builds equity quickly and gets you to full ownership in less time. If you’re on a budget, in debt or if you need more financial wiggle room, a 30-year mortgage may fit the bill.
Federal Housing Finance Agency. “National Mortgage Database (NMDB) Aggregate Data.” Retrieved March 2022 from https://www.fhfa.gov/DataTools/Downloads/Pages/National-Mortgage-Database-Aggregate-Data.aspx