Should You Get a 10-Year Mortgage?

The 30-year fixed-rate mortgage has been the default setting for homeowners, especially while the average mortgage rate has been at or near historic lows for the past decade. Is that the best choice for you? A shorter-term mortgage of 15 or 10 years may make the most financial sense for several reasons.

Shorter loans generally come with lower interest rates. On top of that, a 10-year mortgage, like the new 10-year Freedom Mortgage offered by Cedar Rapids Bank & Trust, will free you from mortgage payments in a third of the time. That combination can save you thousands of dollars in interest.

Eye-popping interest payments

Say you have a $200,000, 30-year fixed-rate mortgage at an interest rate of 3.85%, the 2015 average, according to mortgage giant Fannie Mae. Your monthly payment will be $938 and over the life of the loan you'll have paid $137,542 in interest.

Now look at your 10-year fixed-rate mortgage, with an interest rate of 3.50%, more than half a percentage point less. Your monthly payment will be $1,978 and at the end of 10 years, you'll have paid $37,326 in interest.

If you can afford the higher monthly payments, you'll be saving more than $100,000, which could be invested in retirement savings, certificates of deposit, a college savings account or anything your heart desires.

Building equity faster

Another benefit of the 10-year mortgage is that you'll build equity in your home faster because you're paying more of the principal each month. Say you originated that 30-year mortgage in January 2016. You won't pay more principal than interest until January 2028. By that date, you'd have paid off your 10-year mortgage entirely.

With the extra equity in your home, you could take out a home equity loan to make home improvements or start a business. And the interest on a home equity loan will be tax-deductible.

Good refinancing option

If you've had a 30-year mortgage for some time and want to refinance while the mortgage rates are still low, a 10-year loan is a good option because it won't tie you to a brand-new, long-term mortgage. You'll have a lower rate and will be able to pay off the house sooner, especially if retirement is on the horizon.

Applying for a mortgage

Whichever term you apply for, the process is similar. If you qualify for a 30-year mortgage, most likely you'll qualify for a 10-year loan. Pay attention to your debt-to-income ratio because the lender certainly will want to see that you can handle the higher monthly payment on a 10-year loan.

One more caveat:  If you think your job situation is uncertain, think twice about a shorter-term loan. In the face of a job loss, you might be able to manage the lower 30-year monthly payment for a while, but the high monthly payment on a 10-year mortgage might sink you fast.

The decision

When you're buying or refinancing a home, take into consideration the monthly payments, your comfort level with long-term debt, the tax benefits and your personal situation. How long will you live in the home? How stable is your employment? Buying a home is the biggest money decision you'll likely ever make. Take advantage of the mortgage professionals at your bank to ask questions, and evaluate all your options to find the right loan for you.


Ellen Cannon, NerdWallet

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