10-year fixed mortgage rates are a great solution for anyone who is looking to own their home outright, quickly and effectively. Refinancing to a shorten the length of a borrower’s current mortgage, or refinancing for lower interest rates, will inevitably save a borrower money, too.
These types of mortgages typically offer a lower interest rate than the more traditional 30-year fixed rate mortgages, especially if the 30-year loan was taken out 15 or so years ago (interest rates have declined since then).
A 10-year fixed mortgage has a predetermined interest rate that will not change for 10 years. At the end of the 10 year period, you will own your home outright, unless you refinance again.
Depending on current 10-year mortgage rates, consumers could save a substantial amount of money. (Photo/Flickr)
What are the advantages and disadvantages of 10-year 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 mortgage 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 the best 10-yr mortgage rates will be 75 to 80 percent of a 30-year loan. 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 mortgage.
In exchange for these benefits, 10-year mortgage 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 mortgage at four percent has a $2,024.90 payment. The increased payments may pose a problem for some borrowers.
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.
And though you’ll build equity for your home at a faster rate than a longer loan term, if all of your equity is tied up in the house, you would need to either sell or get a home equity loan to get money out of your investment. Also, if your funds are mostly tied into your monthly home expenses due to the higher mortgage payments, are you able to diversify your assets? Determining if a 10-year mortgage is right for you will be very customized to your specific situation.
When to do a 10-year fixed rate refinance
There are a number of scenarios in which a 10-year fixed refinance makes excellent financial sense. Below are just a few of examples. Always ask a mortgage broker or mortgage professional to help you determine which 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 mortgage 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 $193,597.40.
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.
If you do decide to borrow against your house, ask yourself about your fiscal patterns. Borrowing against your home, repeatedly, for consumer purchases is a bad habit to get into. Use this option selectively.
10-year mortgages are also great to consider during different milestones of your life. Paying off your mortgage quickly means you can start savings for big life event like sending your kid to college or retirement without the burden of a home mortgage.
How to find low, current 10-year refinance rates
More regional, local, and online banks offer 10-year mortgages than in the previous years, but they are still relatively uncommon in the mortgage world. According to the Mortgage Bankers Association, only 18 percent of all refinances are at a 10-year fixed rate.
With that in mind, it might require a bit of legwork to track down the best 10 year mortgage rates, and the best lender. You might have to dig deeper than you would with a traditional 30-year fixed rate. Luckily, most of your research can be streamlined through the internet.
If time is of the essence, it’s always safe to work with a mortgage broker. Having a relationship with a broker that works with many different lenders will increase the chance that you not only find a 10-year fixed rate mortgage in a timely manner but also find a good program at the lowest possible cost.
Preparing to refinance to a fixed 10-year mortgage
Before embarking on your 10-year mortgage rate refinance, prepare yourself to meet a lender’s underwriting criteria. Start by checking your credit score. If you do not have solid credit, it will be almost impossible for you to take out a 10-year refinance mortgage. The better your credit is, the lower your rate will be, too. It will pay you to fix any credit issues before beginning the process.
The next step is to start organizing 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 and organizing your paperwork, get a copy of your credit report and score from all three bureaus, if you’ve already done your diligence checking and updating your credit, there should be no surprises when you start applying for loans.
So, should I get a 10-year fixed rate mortgage?
10-year fixed rate refinances are a powerful financial tool for people who can take advantage of them. They will save you money on interest and let you pay them off more quickly.
For underwater homeowners, it is possible to refinance to a 10-year fixed rate mortgage with the HARP program.
One smart way to tell if your financial situation is in line with the advantages of a 10-year mortgage is to do the math with a mortgage calculator. You can submit personal information like your current interest rate and loan terms to compare how a new 10-year fixed rate will impact your situation. Homeowners who are paying more than 5 percent in interest or homeowners who initiated loans 15 or so years ago (when rates were considerably higher) are prime candidates for refinancing.
Watch mortgage rate forecasts closely. If refinancing is definitely in your future, keep a close eye on when to act in order to secure the best interest rate possible. The Federal Reserve has indicated that rates could continue to rise over the coming years, which means it might be perfect timing to start looking into a 10-year fixed mortgage.