If everything is in place financially for you now and in the future, and you have the option to get a 10- or 15-year fixed mortgage, experts say go for it because of the amazing savings you will encounter.
But these loans are not for everyone, and you shouldn’t approach them nonchalantly.
“You really have to look at all your financials along with your earning potential in the future, the type of career you are in and if it is stable and such things that might cause you more expenses in your life such as starting a family. It all boils down to the entire picture,” says Lisa Bynum, mortgage department manager at Security First Bank in Lincoln, Neb. “These types of loans are usually for the established borrower, not your first-time homebuyers.”
It’s all relative to your needs, she says. But if you can take advantage of all the benefits of a shorter mortgage, then do it because the savings are huge. For instance with a 30-year loan, you would still have 70 percent of the principal to pay off when you write out your last check for the 15-year loan.
Loan Length Cost Comparisons
Let’s compare the cost of different fixed term loans on a $200,000 mortgage:
Term 10 year fixed rate mortgage
Interest rate 3.25% APR*
Monthly payment $1,954.38**
Total P&I payments $234,525.66
Total interest $34,525.66
Term 15 year fixed rate mortgage
Interest rate 3.375% APR*
Monthly payment $1,417.52**
Total P&I payments $255,153.55
Total interest $55,153.55
Term 30 year fixed rate mortgage
Interest rate 4.250% APR*
Monthly payment $983.88**
Total P&I payments $354,196.69
Total interest $154,196.69
*Rates, payments, and APRs that appear on this article are used as examples only to show the differences between costs of various loan terms. These are not live rates nor APRs and may not be available currently. To get a personalized rate quote, click here. **Principle & interest (P&I) only. Does not include taxes/insurance/HOA dues.
It’s easy to see that you save nearly $120,000 in interest if you select a 10-year fixed loan rather than the 30-year term. You could buy another house for what you are saving. But you have to remember that your monthly payments are nearly $1,000 more a month in that situation.
“You really need to do your homework if you are thinking about one of these shorter term loans,” says Mike McHugh, president of Community Mortgage Lenders of America (CMLA) in New York. He also is past president of the Empire State (New York) Mortgage Bankers Association. “If you have taken an overall financial look at yourself, and this is the right spot for you in this time of your life to take a shorter term loan, then great.”
But he says it’s not always easy to get one of these loans. You have to have a higher income because you are sometimes doubling the monthly payment. But the benefits can be outstanding if you can get one and afford it, he says.
Equity Increases Faster with a 10- or 15-year Fixed Rate Mortgage
You will grow equity in your house quicker with a 10- or 15-year loan – a lot faster. Having more equity in your home can help you with a lot of things.
“For instance, if you are ready to retire and you want to buy a condo, the larger the down payment you can put down on that condo from the equity in your home, the better,” Bynum says.
You can also use the equity in your home by taking out a line of credit for things such as college costs and home improvement.
“I personally experienced this within my family,” she says. “The real estate my family owned helped pay for medical bills when the home was sold. But a home has to have equity in it to help you out.”
By building equity, you also can upgrade to a better home sooner and get a better interest rate on that new loan because you have so much more collateral toward the loan.
Another advantage of taking out a 15-year loan term, you can still have affordable payments that aren’t double that of a 30-year loan but you get done paying the loan in half the time. You still have bigger monthly payments, but you might be able to handle it comfortably.
“Ten- and 15-year loans are absolutely great products. Once you get done paying your house off early, it will free up some cash for you,” Bynum says. “It’s not for everyone. Having a shorter loan does give a lot more opportunities when you are getting close to retirement.”
10-Year and 15-Year Mortgages Perfect when Refinancing and Later in Life
McHugh says that 10- and 15-year loans are great for refinancing.
“You can pay off your debt quicker. You are probably more established in your career now and making more money than when you first took out the loan,” he says. “You also have gotten used to house payments and all the insurance and taxes that go with it. First-time homebuyers may be leery of a shorter-loan term because they don’t know yet all the expenses that go into being a home owner.”
McHugh says that one of the big advantages of a shorter term loan, too, is the amazing interest rates you can acquire.
“Sometimes they are a half a point or more below a 30-year loan rates. That can save thousands over time,” he says.