Mortgages come with different loan terms, and a short 10-year mortgage could be beneficial for some borrowers vs. the common 30-year variety. It’s important to consider your personal finances and goals, since the mortgage length affects the interest rate and monthly payment.
This guide will compare the pros and cons of different mortgage lengths and explore how to get a 10-year mortgage term. Read on to learn if paying off a home loan in a decade is the right fit for you.
How Does a 10-Year Mortgage Work?
A homebuyer or refinancer chooses a mortgage term based largely on the monthly payment they can handle and how long they plan to keep the property. In general, the shorter the term, the higher the payment.
The term length isn’t the only differentiating factor among mortgages. There’s also the choice of fixed-rate vs. adjustable-rate mortgages.
With a 10-year fixed-rate mortgage, the interest rate is set for the life of the loan. Through mortgage amortization, the monthly payment on a fixed-rate mortgage stays the same (excluding changes in taxes or insurance if included in escrow payments), making it easy to budget years worth of housing costs.
The amortization schedule determines how the monthly payment is allocated between the principal and interest. Initially, payments primarily go toward interest. Near the end of the loan term, most of the payment will be on the loan principal, with minimal interest remaining.
Adjustable-rate mortgages (ARMs) work differently. A 10-year ARM has a fixed interest rate for 10 years, followed by a fluctuating interest rate until the loan is paid off.
You might see a 10/1 ARM or 10/6 ARM. With a 10/1 ARM, the interest rate is fixed for 10 years and then readjusted every year for the remaining term (usually 20 more years). A 10/6 ARM operates similarly but readjusts every six months rather than annually.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Recommended: How a 5/1 ARM Works
Reasons to Choose a 10-Year Mortgage
No two homebuyers or refinancers have the same financial goals and situation, but there are some common reasons for choosing a 10-year mortgage.
Borrowers may prefer a 10-year mortgage to save on total interest paid. This could be a good option for buyers with higher incomes who can afford larger monthly payments with money still left over for savings and other expenses.
When interest rates are low, homeowners with an existing 20- or 30-year mortgage might choose to refinance to a 10-year mortgage to get out of debt sooner and pay less interest. This scenario could be more beneficial if you plan to remain in your home longer, allowing time to recoup the closing costs of refinancing.
A shorter mortgage term can be helpful for people who are approaching retirement, too. Paying off a mortgage while you’re still earning a salary (and in less time) allows soon-to-be retirees to save money on interest payments. After 10 years, retirees can enjoy their paid-off house or sell the property to further pad their savings and downsize.
Pros of a 10-Year Mortgage Term
Considering a 10-year mortgage term? Here are some of the potential upsides of going with a decadelong mortgage term.
• Faster Payoff: You’ll own your home outright in just 10 years.
• Competitive Rates: 10-year mortgage rates are often lower than rates for mortgages with longer terms.
• Less Interest Paid: A shorter mortgage term means less interest is accrued, and thus paid, over the life of the loan.
• Building of Equity: Putting more money toward your mortgage right away can grow home equity faster, which can be borrowed against later for home improvements or other expenses.
Cons of a 10-Year Mortgage Term
Taking out a 10-year mortgage isn’t without its drawbacks. Here are some downsides to be aware of when considering this type of home loan.
• Higher Monthly Payments: A condensed mortgage term comes with higher monthly payments, putting borrowers at risk if they lose a job or incur emergency expenses.
• Risk of Becoming “House Poor”: Putting more money toward your mortgage could prevent you from achieving other financial goals, such as saving for retirement or college tuition.
• Less of a Tax Deduction: Borrowers who use the mortgage interest deduction on taxes will only be able to do so for 10 years.
• Less Property Choice: Buyers may qualify for a smaller loan amount with a 10-year mortgage than a longer-term loan, reducing the number of homes they can afford.
10-Year Mortgage vs 30-Year Mortgage: How They Compare
It’s helpful to compare mortgage options during the homebuying process. This means looking at different lenders and mortgage term lengths.
The 30-year fixed-rate mortgage is the most popular way to finance a home purchase, with 90% of mortgages lasting 30 years. It’s also the route most borrowers using first-time homebuyer programs take.
Let’s take a closer look at how 10-year mortgages and 30-year mortgages compare.
Interest Rates
Fixed-rate mortgages keep the same interest rate over the life of the loan, helping to make payments predictable.
Lenders use a variety of factors to calculate interest rates, such as credit score, down payment, and economic conditions. Generally speaking, paying the loan back in less time is viewed as less risky for the lender. Thus, 10-year mortgages typically come with lower interest rates than 30-year mortgages.
Monthly Payment
With fixed-rate mortgages, equal installment payments are collected each month by a mortgage servicer.
While 10-year mortgages often have lower interest rates, the monthly payment is significantly higher thanks to the condensed payment schedule. Put another way, the monthly payment for a 10-year mortgage is usually double that of a 30-year mortgage.
For example, a $300,000 mortgage at a fixed rate of 5% with a 10-year term would have a monthly payment of $3,182. Meanwhile, borrowing $300,000 at a fixed rate of 5% with a 30-year term would amount to a $1,610 payment each month. This calculation excludes property taxes, homeowners insurance, and any private mortgage insurance.
You can use this online mortgage calculator tool to estimate your monthly payment.
Getting Qualified
Your debt-to-income ratio (DTI), which is calculated by dividing your monthly debts by your gross monthly income, is an important indicator of your ability to repay the loan.
A DTI of 36% or less is recommended for homebuyers, though borrowers with a DTI of 43% may still qualify for a mortgage.
When applying for a 10-year mortgage, the larger monthly payment will increase your DTI, which could affect your ability to qualify, or at least how much you qualify for. Borrowers may qualify for a larger loan amount with a 30-year mortgage because the monthly payment is lower.
Should Inflation Affect Whether You Choose a 10-Year or Longer Mortgage?
Inflation has an impact on the cost of everything. Homebuyers and refinancers need to know that rising inflation affects mortgage rates.
Choosing a longer mortgage term with lower monthly payments can help safeguard a budget from the effects of inflation.
Most borrowers have the option of making extra principal payments, as their finances allow, to repay the loan faster and save on interest. The same ideas behind how to pay off a 30-year mortgage in 15 years apply to paying it off in 10.
Borrowers can also refinance to a 10-year mortgage later if rates are lower and they have the income to manage the higher monthly payment.
Recommended: Home Loan Help Center
The Takeaway
Opting for a 10-year mortgage can help pay off your home quicker and save money on interest. On the flipside, you’ll have to dedicate more of your budget to payments, potentially at the cost of retirement savings and investments.
Still weighing your options? Check out SoFi Mortgages. Qualifying first-time homebuyers can put just 3% down; others, as little as 5% down.
FAQ
Is 10 years the shortest mortgage you can get?
Borrowers may access mortgages with terms of less than 10 years by working with their bank or credit union, since they have more flexibility and an existing customer relationship to customize a loan.
Are there 50-year mortgages?
Though uncommon, 50-year fixed-rate mortgages exist. With such an extended term, borrowers will pay significantly more in interest over the life of the loan than shorter-term home loans.
Photo credit: iStock/fizkes
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