Takeaways
- 10-year fixed-rate mortgages can help keep debts low and reduce payoff time.
- 10-year fixed-rate mortgages lock in one unwavering interest rate for your term.
- 10-year fixed-rate mortgages usually have lower interest rates than longer-term loans.
- Factors like credit score and credit utilization will determine mortgage eligibility.
- Downsides to short-term mortgages include high monthly payments, high debt-to-income ratio, and less cash to invest.
What is a Mortgage?
A mortgage is a loan from a mortgage provider or bank used to finance the purchase of a home or real estate property. Mortgages are loans backed by the house or property in case you do not make on-time mortgage payments with interest over the mortgage term (or length of the mortgage). Mortgages can vary in length, level of interest rate, type of interest rate, and size.
Most home purchases in the U.S. are financed with mortgages [1]. Understanding mortgage types and terms will help you analyze potential monthly mortgage and interest payments. Monthly mortgage costs will help you create a budget and calculate home affordability. Factors like your credit score and credit utilization will determine your eligibility for certain types of loans.
What is a 10-Year Fix-Rate Mortgage?
A 10-year fixed-rate mortgage operates like other fixed-rate mortgages and is generally considered a shorter-term mortgage. For a 10-year fixed-rate mortgage, your term is ten years, which means you have that time (120 payments) to pay off the principal balance plus interest in full.
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During that decade, however, the interest rate you agree to with your mortgage provider at the beginning of the term is “locked in.” A fixed interest rate means the interest rate will remain unchanged throughout the life of your loan (e.g., it will be the same in 10 years). For example, if you secure a mortgage with a 7% interest rate in 2024, that will be the interest rate until the loan is paid off in 2034.
Smart Tip:
Mortgages with lower term lengths often command lower fixed interest rates.
5 Advantages of 10 a Year Mortgage
The most common types of mortgages in the U.S. housing market are the 30-year fixed-rate mortgage and the 15-year fixed-rate mortgage. However, there are plenty of reasons to choose a mortgage with a lower term. Here are five ways to know that a 10-year fixed-rate mortgage might be the best option for you:
- Keep Debts Low: Most homebuyers borrow longer-term mortgages - 15, 20, or 30 years - to increase their monthly affordability. Whether you are a first-time home buyer or not, you might not want to focus on mortgage payment affordability. Instead, you might want to concentrate on keeping your total debts low (which increases net worth).
- Decrease Payoff Time: One of the best parts of a 10-year mortgage is that your term loan is a decade. This means that you will be mortgage-free in only ten years. For those in the FIRE community, a 10-year mortgage can be incredibly attractive as a forcing function to keep debt low while simultaneously forcing a shorter payback time.
- Reduce Total Interest: Interest is the amount you pay a mortgage provider or bank to borrow capital to buy your house. Interest represents the cost of capital. When interest rates are high, the cost of borrowing is high. In contrast, in a low-interest-rate environment, mortgage borrowing costs are low. Because a fixed rate interest rate does not fluctuate, you can calculate how much interest you will pay over the life of your loan. Due to its shorter term, you will pay less total interest on a 10-year loan than an equivalent 15-, 20-, or 30-year loan.
- Accruing Home Equity: You can pay off your mortgage principal faster with a 10-year fixed mortgage rather than a 20- or 30-year. A shorter payback period will let you accumulate home equity quickly. Home equity is the ownership value of your house. You can leverage this equity by taking out a home equity loan (HELO) to improve your house or property.
- Financial Discipline: Shorter terms make you consider mortgage affordability. For some borrowers, ensuring you can make your monthly payments will usher in financial discipline. Creating a budget will help you keep track of income and expenses.
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Cons to 10-Year Mortgage
Are you considering a 10-year fixed mortgage? Think carefully about this decision because shorter-term mortgages can wreak havoc on undisciplined borrowers. Here are some disadvantages to a 10-year fixed mortgage:
- High Debt-to-Income (DTI): Your monthly debt-to-income ratio will be high if you choose a shorter-term loan. A 10-year mortgage will have higher monthly mortgage and interest payments than longer-term loans, which means a higher percentage of your monthly paycheck will go toward paying for your home.
- Opportunity Cost to Invest: With a focus on paying higher mortgage payments, you could have less cash to spend on other activities that might increase your net worth. However, you could be using those funds to invest in stocks, bonds, ETFs, or mutual funds (which could yield a higher rate of return).
- House Rich, Cash Poor: Not only will you have to be content with the opportunity cost of investing your mortgage payments into higher returning investments, but you also might have to grapple with simply not being able to spend on things you love. Allocating more of your income to paying off your mortgage might mean you need to increase your income to keep your lifestyle.
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5 Alternatives to a 10-Year Mortgage
Paying off your mortgage can be an attractive proposition. Living in a home you own would free up monthly income previously spent on mortgage payments to be allocated to other activities like travel, entertainment or even investing in real estate. You don’t have to take out a 10-year mortgage to get those benefits. Here are some alternatives to provide similar value:
- Recast Your Mortgage: Recasting a mortgage is when you pay a large chunk of your principal balance in a lump sum payment. Your mortgage lender then issues you a new loan with a lower principal balance, which you will pay less interest on over the life of the loan (assuming you keep the same interest rate). Check with your mortgage provider to see if you can recast your loan.
- Refinance Your Mortgage: There are times when market interest rates drop below your mortgage’s fixed rate. This could be an ideal time to consider refinancing. Refinancing your mortgage allows you to get a new mortgage with a refreshed principal and an interest rate with more favorable terms.
- Make Higher Payments: Opting for a 30- or 15-year mortgage will increase your monthly affordability by reducing your mortgage payment. If you want to make payments against your principal balance over time, you can do that. Longer terms allow you to enjoy the flexibility of lower payments while proactively reducing your mortgage balance.
- Make Biweekly Payments: Most mortgage payments are monthly. However, if you choose to pay your mortgage biweekly, you make payments every two weeks. This allows you to make extra payments throughout the term of your loan and reduce the total interest you must pay and the time to repay your mortgage.
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How Do You Know You Are Ready?
Choosing a 10-year fixed mortgage can be a heavy financial decision. You want to go into that decision with clear eyes. So how do you know if you are ready? Here are some clues you are prepared to handle a 10-year fixed mortgage:
- Small Mortgage: Most homebuyers take out a longer-term mortgage - 15, 20, or 30 years - to increase their monthly affordability. Whether you are a first-time home buyer or not, you might not want to take out a big mortgage with a longer term.
- Budgeted for Payments: Consult your budget to ensure you are ready for higher monthly mortgage payments. Systems like the 50/30/20 budget have specific guidelines to help you manage spending categories throughout the month.
- Cash Rich: Keeping a high cash cushion with an emergency fund and slush fund can increase your comfort with getting a 10-year fixed mortgage. The emergency fund provides a hedge against unexpected expenses, while a slush fund of three to six months of living expenses provides some distance from having to dip into retirement savings.
- Healthy Retirement Savings: An alternative to having a high cash cushion is to have healthy retirement savings. If you have already prioritized saving for retirement, focusing on taking on a shorter-term mortgage could be what you need to boost your net worth even higher. Additionally, some retirement accounts like 401(k)s offer 401(k) loans in case you need relatively quick access to cash.
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Smart Summary
Selecting the best mortgage term and lender is an important financial decision. Make sure it aligns with your financial goals. Weigh the pros of a fixed versus variable interest rate and the mortgage term. For the financially prepared, signing up for a 10-year fixed-rate mortgage can set you up for financial success. Discuss affordability with your mortgage provider or consult a financial advisor to discuss various scenarios. Choosing the best mortgage for your financial situation is a smart money move.
(1) National Association of REALTORS®. 2023 Profile of Home Buyers & Sellers. Last Accessed March 6, 2024.
