But 15- and 30-year loans aren’t the only options. Many lenders offer a 10-year loan, a 20-year loan and even some customized loan terms.
“While the 10-year loan is one of the least utilized options, it does fit well in some clients’ financial plan,” Tom Trott, branch manager at Embrace Home Loans’ Frederick, Md., office, wrote in an email. “The 10-year mortgage loan is not as popular as longer loans, such as 20- and 30-year mortgages. Clients must have significant discipline and strong cash flow to qualify for 10-year mortgages.”
For borrowers with a specific goal in mind, such as paying off their mortgage before retirement or before paying college tuition, a 10-year loan could be a good option.
The two main advantages of a 10-year fixed-rate mortgage, wrote Trott, are the lower interest rate vs. longer-term loans and the faster pace at which you can build equity in your home.
For example, the principal and interest payment on a $300,000 loan is $1,225 for 30 years at 2.75 percent vs. $2,794 for 10 years at 2.25 percent. While those payments on the 10-year loan are significantly higher, the loan would be paid off 20 years earlier. In addition, the interest paid on the 10-year loan is approximately $35,000, compared with $72,000 just in the first 10 years of the 30-year loan and $140,900 over the entire 30 years.
“While the 10-year fixed rate mortgage option provides the lowest interest rate or cost of interest and, in turn, the lowest borrowing costs over any other fixed-rate term, there is a catch,” wrote Matt Weaver, vice president of CrossCountry Mortgage in Boca Raton, Fla. “Since the loan is amortized — or spread out — over 10 years, the principal portion of the payment is higher than all other mortgage terms. This makes the loan more difficult to qualify for due to debt-to-income ratio calculations. Even if qualified, however, many consumers are sometimes not comfortable with the higher payments that are associated with the 10-year term.”
A debt-to-income ratio compares the minimum payment on all recurring debt with the borrower’s gross monthly income. Most loan programs require a maximum debt-to-income ratio of 43 percent. A lower debt-to-income ratio is preferred, although some loan programs allow a debt-to-income ratio as high as 50 percent.
“When given a choice between 10 and 15 years, most clients opt for the 15-year mortgage as the rates are usually identical,” wrote Trott. “Another option to consider is a 10-year adjustable-rate mortgage (ARM), which gives you a fixed rate for 10 years and a lower payment associated with the 30-year amortization.”
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