Homeowners who consistently track the lowest mortgage rates for 15- and 30-year fixed-rate home loans to decide when to refinance may be missing out on two other loan products that could meet their needs: 10- and 20-year loans. If you're in the market for a mortgage refinance, you should carefully decide why you want to take out a loan. If you're looking for lower monthly payments to ease cash flow, pay off other debt, or invest in other financial instruments, then refinancing into a new long-term loan makes sense. On the other hand, if your goal is to pay off your mortgage faster so you're debt-free or you want to reap a larger profit when you sell, a shorter term loan can be a viable option.
Freddie Mac reports that nearly one-third of all refinancing homeowners with a 30-year loan opted to shorten their loan term during the first quarter of 2013.
10-year loan option
Mortgage loans with shorter terms carry a lower interest rate than 30-year loans, but the spread between these loans varies as often as the mortgage rates themselves change. If you're considering a shorter loan term, you can use a mortgage calculator to estimate your principal and interest payments.
For example, if you want to compare payments on a 15-year mortgage loan and a 10-year mortgage loan for $200,000, you can use a calculator and an estimated interest rate. For instance, a 10-year loan for $200,000 at 2.5 percent would have principal and interest payment of $1,885, while the 15-year loan at 3.0 percent would have a principal and interest payment of $1,382. If you can afford the additional $503 per month, you can save $22,361 in interest payments overall.
10-year loan benefits
A recent article by Washington Post syndicated columnist Ken Harney described the ideal candidate for a 10-year loan: mid-50s to early 60s with good credit, decent income, significant home equity who wants to pay off their mortgage before or near their retirement date.
Here are some reasons to consider a 10-year mortgage loan:
- You can accelerate your loan pay-off date
- You would pay interest at a lower rate
- You would pay less interest over the life of your loan
- You can build home equity more quickly
One caveat for borrowers considering a 10-year loan: Make sure you have sufficient income to handle the payments as well as contributing to your retirement fund and other investments. If the payments are too high, you can always achieve similar results, although at a higher interest rate, by making extra payments on your principal when you have funds available. Consult a lender or a financial advisor to see how a 10-year fits into your financial plans.