Whether you already have a 10 year fixed mortgage or are thinking about refinancing to a shorter term loan, today’s low rates make 10 year loans a better deal than ever. 10 year loans have two distinct advantages over more traditional mortgages — they carry lower interest rates, and they get paid off much faster.
Preparing to Refinance to a Fixed 10 Year Mortgage
Before embarking on your 10 year loan, prepare yourself to meet a lender’s underwriting criteria. Start saving your bank statements, investment account statements, credit card statements and pay stubs. Many lenders will want to see 90 days of account history. You may also need historical tax returns for the last two to three years.
Once you have started saving paperwork, get a copy of your credit report and score from all three bureaus. If you do not have solid credit, it will be almost impossible for you to take out a 10 year refinance mortgage. Also, the better your credit is, the lower your rate will be. It will pay you to fix any credit issues before beginning the process.
How to Find Low 10 Year Refinance Rates
The key to finding a competitive offering is to work with a mortgage broker. While your neighborhood bank is extremely likely to offer a 30 year refinance rate option, 10 year loans are relatively uncommon in the market. As such, having a relationship with a broker that works with many different lenders will increase the chance that you not only find a 10 year loan, but also find a good program at the lowest possible cost.
What are the Benefits of 10 Yr Mortgage Rates
These loans have two key benefits — extremely low rates and extremely fast payback times. The second benefit is obvious — by definition, you pay off your 10 year loan in one-third the amount of time it would take to pay off the 30 year loan.
10 year refinance rates are low because they are safer loans for lenders. After all, if you pay the loan off in one-third the amount of time, it also means that the bank gets their money back three times faster. While mortgage rates vary greatly, a good rule of thumb is that a 10 year mortgage loan’s rate will be 75 to 80 percent of a 30 year loan’s. In other words, if the prevailing rate for a 30 year loan is five percent, you should pay between 3.75 and four percent for a 10 year loan.
In exchange for these benefits, 10 year loans carry higher payments than equivalent 30 year mortgage loans. While the payment on a $20,000 30 year loan at five percent would be $1073.64, a 10 year loan at four percent has a$2,024.90 payment. Although this seems like a problem, it hides a much larger benefit. If you can afford to make the larger payment, you will save approximately $143,000 over the life of the loan. The 10 year loan’s total payments are around $243,000, compared with the $387,000 that a 30-year loan costs.
When To Do a 10 Year Refi
There are a number of scenarios in which a 10 year refinance makes excellent financial sense. While these are just a few of them, your mortgage broker can help you determine if this program is right for your specific situation.
- To become debt-free faster. As the above example shows, if you can afford to make the higher payment, a 10 year loan will get you out of debt in one third the time and save you a great deal of money.
- To refinance a 15 year loan. If you have a 15 year mortgage from a few years ago, you can save money and a little bit of time by switching to a 10 year loan. For instance, a three-and-a-half year old $200,000 15 year loan at a 4.5 percent interest rate carries a monthly payment of $1529.99. After three-and-a-half years, its balance would be $164,591.52. Refinancing that sum at three percent for 10 years yields a monthly payment of $1,589.31. In other words, by spending an extra $60 a month, you can avoid making 18 payments.
- To refinance an old long-term loan. If you took out your 30-year mortgage 15 years ago and refinance it with another 30 year loan, you will end up making payments for 45 years. Replacing an old loan with a new short-term loan can save you money while also letting you pay off your loan quickly. For example, consider a 15-year old $250,000 30-year fixed rate mortgage at 8.25 percent. It carries a monthly payment of $1,878.17 and has a current balance of $193,597.4. Refinancing it with a 10 year loan would not only let you pay the loan off five years faster, but also cost you just $1,869.39 a month, saving you a little bit. If your old loan is at an even higher interest rate, or is even older, the savings in time and money can be much greater.
- To borrow cash against a paid-off house. While many financial advisors recommend not to borrow money against a paid off house, it can be an excellent strategy. For example, if you have a great deal of credit card debt or are considering the purchase of a boat or RV, using a 10 year cash-out refinance can save you a great deal of money. By using your house as collateral, you can get a much lower interest rate. Using a 10 year term lets you get the debt paid off quickly so that you can go back to mortgage-free living. Another benefit of doing this is that the interest may be tax deductible, depending on how much you take out and how you use it.
10 year fixed rate refinances are powerful financial tools for people who can take advantage of them. They will save you money on interest and let you pay them off more quickly. Given today’s low rates, it is an excellent time to start the process of finding your new mortgage.