10-Year Fixed Refinance Mortgage Loan
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One of the ways to speed up paying off a mortgage is to refinance it into a shorter term loan. You may be familiar with the popular 30-year and 15-year refinances, but the 10-year refinance is a lesser-known option. It could be a good option for homeowners who decide it’s time to refinance and can afford to pay the potentially higher monthly payments that come with a shorter term loan.
In this post, we will lay out the pros and cons of the 10-year fixed refinance mortgage and alternatives.
- 10-year fixed refinance: What’s the deal?
- Benefits of a refinancing to a 10-year fixed rate mortgage
- Is a 10-year fixed refi right for you?
- If you want to pay your loan off faster, what are better ways to do it?
- How to shop for a 10-year mortgage refinance
10-year fixed refinance: What’s the deal?
The main reason for any homeowner to refinance to a 10-year fixed mortgage loan is to eliminate a mortgage more quickly and save money on interest payments.
For example, let’s say you originally took out a 30-year mortgage and you decide that rates are favorable enough now that you might be able to get a better rate by refinancing. But you only have about 10 to 15 years’ worth of payments left on your loan. If you opt for a longer term mortgage, you could lower your monthly mortgage payment but you’d also be exposing yourself to greater interest charges over time.
Benefits of a refinancing to a 10-year fixed rate mortgage
Lower rate. The interest rate on a shorter term mortgage is typically lower than the interest on a longer term one. The average rate for 30-year FRM was 4.57% as of June 21, 2018, while the figure for a 10-year FRM was 3.75%.
Faster pay off saves money on interest. Someone who refinances to a 10-year fixed rate mortgage will not only pay interest over fewer years but will spend less in interest over the course of the mortgage than with a longer-term loan.
Let’s say you need to refinance your mortgage, which is currently at $200,000.
|10-year vs 30-year comparison|
|30-year FRM||10-year FRM|
A 30-year FRM with a 4.4% interest rate translates to a total monthly payment of $1,001.52. Over the life of the loan, you’ll end up paying the lender $360,547.86.
In comparison, for a 10-year FRM with a 3.7% interest rate, you will need to pay $1,996.51 each month, almost double the 30-year FRM monthly payment. However, over 15 years, your total repayment will be $239,581.17, a difference of more than $120,000.
You’ll build equity more quickly. Because your monthly payments are higher with a 10-year fixed loan, that means more of your monthly payments will be going toward your principal each month. As a result, you’ll be building equity in your home at a faster pace.
“More than five times the amount of loan principal is paid off every month with a 10-year fixed loan than with a 30-year loan,” said Evan Vanderwey, a branch manager at Churchill Mortgage in Okemos, Mich.
Drawbacks of a 10-year fixed refinance
Closing costs. You need to take into all the associated fees that come along with a refinance. These fees usually include the document preparation fee, title search and insurance, loan origination fees, mortgage application fees and home appraisal charges, which can add thousands of dollars to your loan.
Experts say for a refinance to make sense, the benefit of a 10-year fixed needs to outweigh the associated cost of a refinance.
This means when deciding whether to refinance or stay put, if you work with a loan officer, you should ask for details of your loan options and how they compare with your current mortgage. Basically, calculate the interest you will accrue over the 10-year span of the new loan, factoring in the additional refinance costs. You will be better off refinancing your mortgage to a 10-year fixed only if the two numbers combined is smaller than the amount of interest fees you’ll have to pay on the remaining balance of your current loan.
Higher monthly payments may be unaffordable. Because you are paying off a mortgage much faster, your minimum payment on a 10-year fixed is more than the 30-year loan. It could double that of a 30-year fixed loan, as shown in the example in the previous section.
Vanderwey said you need to make sure you can commit a significantly higher minimum monthly payment while achieving your other financial goals, such as saving for retirement.
Reduced tax benefit. If you are someone who can itemize your tax returns, your tax benefit may be reduced because the amount of interest you are paying is greatly reduced with a 10-year loan, Vanderwey explained.
Is a 10-year fixed refi right for you?
While it has great financial advantages, a 10-year fixed rate is one of the lesser used mortgage options because it doesn’t fit for most Americans, Vanderwey said. Spreading out a major loan over just 10 years can be difficult to afford.
“A shorter loan is a cheaper loan, but a longer loan might be a more affordable loan,” said Tendayi Kapfidze, chief economist at LendingTree.
Experts don’t recommend those people who haven’t fulfilled other financial goals to refinance to a 10-year fixed mortgage loan.
“If the borrower is carrying higher-interest credit card debt, it might be better for them to either take on the longer term loan with lower monthly payments and use the cash saved by the lower monthly payments to pay down that debt,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings.
Another consideration is whether the borrower would be able to put the monthly cash savings to better use in an alternative investment strategy rather than accelerating the payments on their home, Sharga added.
In sum, whether to refinance to a 10-year fixed depends entirely on the individual borrower’s personal financial situation, but in general, it only makes sense for someone to do so when they don’t have other debt obligations, have funded their retirement accounts and can afford large monthly payments.
Whom is it best for?
For any loan, the trade-off for a smaller lifetime interest payment is higher monthly payments.
When contemplating a 10-year fixed, Kapfidze said you need to examine your own financial situation and see if the substantial monthly payment fits into your budget.
According to Vanderwey, two groups of homeowners are in a good position to swing a 10-year fixed.
Vanderwey said it can be a good tool for someone who’s approaching retirement and hopes to get rid of the mortgage soon. The premise to that is they have no other riskier debts and their retirement accounts are cash-flush.
Another group of homeowners that are increasingly looking to refinance to a 10-year fixed mortgage are families with young children, according to Vanderwey. They are typically working professionals with stable incomes hoping to eliminate a mortgage before their children go off to college. Once they’ve quickly paid off their mortgage in 10 years, they can redirect the cash they once used to cover mortgage payments to fund their children’s higher education.
If you want to pay your mortgage off faster, what are better ways to do it?
If you are considering paying off your loan faster, but aren’t sure if a 10-year fixed is a good fit, there are a couple of alternatives to consider.
Make extra payments on your current loan
You could simply pay more than your required monthly payments toward your mortgage. In most cases, you can repay your current loan quickly with no prepayment penalty, experts say.
This way, you won’t necessarily be committed to a 10-year payment plan, but you can pay it off in 10 years if you can, which lessens your total interest.
“You can always pay your loan off anytime you want,” Kapfidze said. Just check to be sure your lender doesn’t charge prepayment penalties.
However, if you have a 30-year loan and pay it off in 10 years, you are still going to pay more on interest than a 10-year loan, because the shorter loan has a lower rate. But paying off a longer-term loan faster gives you much financial flexibility in case any unexpected happens.
Further, with this approach, you don’t have to commit to a significant amount of mortgage payment every month.
Anytime a financial windfall hits, such as a tax refund or an annual bonus, you can pay extra toward your mortgage. And if you don’t have extra to pay, you can just pay the minimum, and the lender won’t come after you.
Consider a 15-year refinance term instead
If you take on a 30-year mortgage loan, depending on your financial situation and how long you plan to stay in your home, subbing a 10-year fixed loan for your current mortgage may not be the best option. A possible compromise would be a 15-year fixed rate refinance loan.
“Those who can afford it should consider it,” Vanderwey said. “Sometimes a 10-year is just too much to bite off.”
The 15-year fixed rate mortgage is the second most popular mortgage option among American homeowners, after the 30-year fixed, according to the U.S. Bureau of Labor Statistics.
With a 15-year FRM, your payment is stretched out over 15 years, making a monthly payment fit into your budget more easily than with a 10-year fixed loan. The monthly payments are higher with a 15-year mortgage than with a 30-year mortgage, but because its interest rate is lower, you can save interest payments over the loan’s term.
How to shop for a 10-year mortgage refinance
Once you are ready to apply for a 10-year mortgage refinance, you should start rate shopping.
According to LendingTree’s most recent Mortgage Rate Competition Index, borrowers could save 0.62% in interest rate by shopping around. On a 30-year mortgage, a borrower could potentially save $28,890 on a $300,000 loan. That’s almost 10% of the entire loan amount.
It’s generally recommended that borrowers check with two or three lenders to make sure they are getting the best deal in rate and costs. Once you’ve shopped around and received quotes from different lenders, then you can go forward with the one that you feel most comfortable with.
If you hope to be free from doing the legwork yourself, you can use this online tool by LendingTree to potentially compare quotes from multiple lenders before applying for a mortgage refinance.