Serial refinancers opting for 10-year mortgagesby Michele Lerner
When Richard Levy, a Washington, D.C. homeowner, saw mortgage rates dropping dramatically several months ago, he contacted his mortgage broker to discuss the idea of refinancing his condo for a third time.
“I wanted to take advantage of lower interest rates and also consolidate a mortgage and a home equity line of credit,” says Levy. “But I only wanted to do so if I could shave at least a full percentage point off my current rate.”
Levy was recently able to lock in a 10-year mortgage at 3.35 percent, more than a full percentage point below the 4.42 percent interest rate he was paying on his previous 15-year mortgage.
“If I refinanced to another 15-year loan, the mortgage rate would have only gone to 4.1 percent,” he says.
The advantages of a 10-year mortgage
The combination of a lower interest rate and loan term have made shorter-term mortgages increasingly popular during this extended refi boom. Especially for homeowners for have already refinanced, 10-year loans present another opportunity for additional savings.
Levy estimates that he will save $30,000 in interest payments by choosing a 10-year mortgage over a 15-year mortgage for his most recent refinance.
Furthermore, since Levy was already paying down the balance on his 15-year loan for a few years, he didn’t want to start from scratch by choosing another 15-year term.
Qualifying for a 10-year mortgage
Jim Snyder, a certified mortgage consultant with Inlanta Mortgage in Pewaukee, Wis., says borrowers need to meet the same qualifications for a 10-year loan as they do with a longer term mortgage, such as a credit score of at least 640 or higher, and a maximum debt-to-income ratio of 45 percent.
“If you want to take on a 10-year mortgage you really shouldn’t have any other debt. Until you have paid off your other debts, are hitting your retirement savings goals, your college tuition savings goals and have an adequate emergency fund, you’re better off with at least a 15-year mortgage,” says Snyder.
“It’s a hefty monthly payment,” says Levy. “You have to really make sure you can carry it. Also, you have to make tougher choices about whether you can travel or afford any luxury items.”
10-year mortgage rates
Here are mortgage rates for various loan terms quoted by U.S. Bank on Oct. 16, 2012:
- 30-year fixed-rate mortgage: 3.25 percent
- 15-year fixed-rate mortgage: 2.75 percent
- 10-year fixed-rate mortgage: 2.75 percent
(Remember, mortgage rates fluctuate daily and can vary depending on factors like your credit score.)
The monthly payments for principal and interest on a $200,000 mortgage are as follows:
- 30-year mortgage (3.25 percent): $870
- 15-year mortgage (2.75 percent): $1,357
- 10-year mortgage (2.75 percent): $1908
Disadvantages of 10-year mortgages
The main drawback to a 10-year loan–the reason this loan term is less common–is that the monthly payments are significantly higher. Snyder says he estimates that 10-year mortgages represent less than two percent of his company’s mortgages.
“With a 10-year loan you lose the flexibility of making smaller payments if you need to,” says Snyder. “Of course, some people want to be forced to make larger mortgage payments to pay off their loan faster.”
If you think you may have trouble affording the monthly payments, Snyder recommends that borrowers opt for a 15-year mortgage and then prepay the mortgage to pay off the loan within 10 years.
While a 10-year mortgage isn’t for everyone, if you have the ability to make the monthly payments you can save thousands in interest payments.