The 10-year fixed-rate mortgage is all for low rates and a faster approach to mortgage repayment. If your goal is to accumulate equity faster and eliminate your mortgage debt sooner, this could be the home loan for you. Interestingly, the 10-year FRM has charmed refinancers more than purchasers. Are you and the 10-year FRM a match?
10-Year FRM’s Interest and Rate
There are two main reasons why the 10-year fixed-rate mortgage is a powerful product:
- Low rates.
- Interest savings.
Rates on the 10-year fixed-rate mortgage are lower compared to its longer-term counterpart, the 30-year fixed mortgage. While rates could easily vary and change, the 10-year fixed rate can be a quarter to half a percentage point off the 30-year’s rate. A lower rate translates to a lower monthly payment, more of the payment scheme below.
Indeed, you’ll be repaying your loan thrice as fast with a 10-year fixed mortgage. This expedited loan schedule saves on the interest paid throughout the life of the loan. Why? Your payments are set up higher so you can pay off your debt within 10 years’ time.
Essentially, the 10-year fixed mortgage fetches the lowest rate among its longer-term counterparts but requires the highest payment so you can save on the interest.
Let’s illustrate the rate and interest differences between the 10-year and 30-year loans using a $150,000 loan with theoretical rates:
- Option 10-Year FRM: With a rate of 3.75%, you’ll be making a monthly payment of $1,500.92. The interest you will pay throughout the life of the loan is $30,110.24.
- Option 30-Year FRM: On a 4.50% rate, you’ll be making a monthly payment of $760.03. The total interest paid throughout the life of the loan is $123,610.07.
More Fun With Refinance
Because the 10-year fixed mortgage starts off with higher payments, homeowners often use it for refinancing instead of for buying. Their strategy is to get a refinance and bring the rate further down. When rates are falling, expect shorter-term loan rates to go even lower.
Refinancing into a 10-year FRM is done by homeowners who want to shorten their longer-term mortgages. Supposing you have paid 15 years off your 30-year mortgage, if you take out another 30-year mortgage it will only add up to your total mortgage repayment time that now becomes 45 years.
Despite the higher payment, the 10-year fixed mortgage will be able to cut back the time needed to repay the loan. If all goes well during those 10 years and you are able to make payments just fine, a mortgage-burning party is in order.
It’s also easier to tap into your home equity when you are virtually mortgage-free or have paid down your mortgage substantially. You can try a cash-out refi, a home equity loan, a home equity line of credit, or a reverse mortgage if you are aged 62 and older.
Getting a 10-Year Fixed-Rate Mortgage
Applying for a 10-year fixed-rate mortgage entails more or less the same process as getting any mortgage with the credit, debt-to-income and loan-to-value ratio as the primary requirements.
Make sure that you are indeed getting a 10-year fixed-rate mortgage and not the 10-year adjustable-rate mortgage. The latter has a fixed rate period of 10 years but its rate is bound to adjust thereafter for its remaining term of 20 years.