Year Adjustablerate Loans Vs 10year Fixedrate Loans
When youre looking at 10year mortgage rates, note the difference between a 10year fixedrate mortgage and a 10/1 adjustablerate mortgage .
You may see 10/1 ARM rates advertised. But dont be confused. These are almost always 30year mortgages.
The 10/1 means that the initial ARM interest rate is fixed for the first 10 years of the loan. After that, it may rise or fall each year depending on which way the broader interest market is trending.
A 10year FRM, on the other hand, has a fixed mortgage rate that stays the same throughout the life of the loan until you pay off the loan, sell the home, or refinance. This means payments are fixed and reliable, too.
10/1 ARM rates vs. 10year fixed mortgage rates
Traditionally, adjustablerate mortgages have lower interest rates than comparable fixedrate mortgages.
Lower rates reflect lower risk on the lenders part. Since you agree to a potentially higher rate after the initial fixed period, ARMs are inherently less risky for lenders.
But some of that reward has been eroded over the last decade or so, as interest rates have generally only moved downward. Rates that are likely to be lower rather than higher deincentivize lenders from offering far lower rates on ARMs.
Compared with FRMs generally, you can still find lower rates on some types of ARMs, especially those with shorter fixedrate periods.
But, by the time you get up to 10/1 ARMs, youre likely to find little advantage and sometimes even a disadvantage.
Other Ultra Short Loan Terms
Quicken Loans offers an 8-year fixed-rate mortgage through its YOURgage program. This loan program allows borrowers to choose any loan term from eight to 29 years. Quickens 8-year terms option was the lowest fixed-rate term weve found from lenders online.
How much do you save with an 8-year loan? Lets say a borrower takes out a $200,000 mortgage on an 8-year fixed-rate loan at 3.25% percent and 70 percent loan-to-value , the payments would be around $2,350 monthly.
When you compare that to a 30-year fixed loan at 3.5 percent, the cost would be about $900 per month.
This creates a huge difference in monthly mortgage payments $2,350 for the 8-year loan vs. $900 for the 30-year loan. But the savings in interest from making such a big payment would be astronomical:
- 8-year term: $29,000 in interest
- 30-year term: $123,000 in interest
Thats a savings of $94,000 to borrow the same loan amount of $200,000.
Remember, you can achieve similar savings by getting a longer-term mortgage and paying a lot of extra cash on the principal each month. You dont have to lock in an 8-year fixed-rate mortgage.
Can You Shorten An Extended Mortgage Once Youve Taken It Out
Another option is to take out a longer mortgage at the start and then shorten it later on by remortgaging, for example, you can shorten a 25-year mortgage to a 20-year one. In many ways this can be an attractive option. Your personal circumstances can improve over time you may start to earn more money, you might inherit some money, and the same could apply to your partner. This could help you afford higher monthly repayments.Therefore, you could initially buy a home by taking out an extended mortgage and then look to shorten the terms of that mortgage as soon as you can, by remortgaging to a shorter term.
As a mortgage is secured against your property, it may be repossessed if you do not keep up the mortgage repayments.
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What Is The Age Limit For Getting A Mortgage
Each lender sets its own age limit for mortgage applicants. Typically, this is either:
- your age when you take out a new mortgage, with the limit ranging from around 70 to 85
- your age when the mortgage term ends, with the limit ranging from about 75 to 95
Regardless of how old you are when you take out a mortgage, youll need to be sure you can afford the repayments throughout the full term, including on any outstanding balance after you retire.
If youre having issues with age limits or repayments, you could consider a lifetime mortgage, which is a type of equity release. However, youll need to bear in mind that releasing equity in your property can affect your eligibility for some state benefits and also impacts on what your estate is worth when you die.
Some lenders offer retirement interest-only mortgages, which allow you to pay off the interest only, meaning your repayments should be lower. The loan amount is usually paid off when the last borrower moves into long-term care or dies.
Grabbing A Lower Interest Rate
When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both.
Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly over more years.
In the first quarter of 2020, which mostly includes pre-pandemic refinance activity, 55% of borrowers who refinanced maintained their current principal balance or increased their balance by less than 5% , according to Freddie Mac data. This is the most common choice: a rate-and-term refinance.
A higher credit score will help you get a better interest rate on your mortgage. To get the best rates, youll need a credit score of 760 or higher. Almost 3 in 4 homeowners who refinanced in April 2020 had a credit score of 750 or higher, according to mortgage processor Ellie Mae. The average FICO score was 763.
Bringing cash to closing might also get you a slightly lower interest rate or allow you to avoid private mortgage insurance . Three percent of borrowers did this during the first quarter of 2020.
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What Is A 10year Fixed Mortgage
A 10year mortgage is simply a home loan with a 10year term. A term is the amount of time it takes to pay down your loan in full.
Most people choose a fixedrate mortgage with a 30year term.
But a shorter term, like a 10year loan, costs way less in interest for two reasons:
A 10year mortgage probably sounds great so far. But theres one big drawback.
Higher monthly mortgage payments
The biggest drawback to a 10year mortgage and the thing that keeps most people from getting one is that it has much higher mortgage payments than a longerterm loan.
If you borrow a big sum over 30 years, you get 360 monthly payments over which to pay off the loan.
If you borrow the same sum over 10 years, you get only 120 months to pay down the same balance.
Take a look at one example of how 10year mortgage payments might compare to a 30year loan:
| $155,300 |
*Interest rates shown are for sample purposes only.Your own rate will be different
Payments for a 10year mortgage are not three times as much as a 30year mortgage.
But theyre significantly more enough to put this loan type outside most peoples monthly budgets.
Should I Use A 10year Mortgage Loan
For most people, the additional monthly cost of spreading mortgage payments over 120 months instead of 360 is just too high.
But if you have plenty of spare money at the end of each month, 10year mortgage rates are well worth exploring.
Who benefits most from a 10year fixed mortgage?
There are a few scenarios in which a 10year loan term makes particular sense
- Youre buying a different home 10 or so years before you retire and want to have it paid off when you do
- You have a new job or raise that lets you afford the higher monthly payments
- Youre refinancing 515 years into paying down your mortgage and you dont want to restart the clock with a new 30year loan
- You want to pay off your mortgage loan ASAP, and can afford the higher payments by prioritizing your mortgage over other potential expenses
If youre a younger, firsttime home buyer, a 10year mortgage might not be the best choice.
A longer loan term will free up your monthly budget for other homeownership costs that usually pop up .
And you still have the option to refinance to a shorter loan term later on, maybe when youre making more money or have lower monthly debts .
Pros and cons of a 10year fixed mortgage
Federal regulator the Consumer Financial Protection Bureau has a graphic that neatly sums up the pros and cons of 10year mortgage rates:
Image: CFPB
If you think a 10year mortgage term is right for you, be sure your income and monthly budget are reasonably secure.
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Is It Wise To Use A Mortgage Broker
Working with a mortgage broker can save you time and fees. Cons to consider include that a brokers interests may not be aligned with your own, you may not get the best deal, and they may not guarantee estimates. Take the time to contact lenders directly to find out first hand what mortgages may be available to you.
How Do 30year Mortgage Rates Compare To Other Loan Types
Todays 30year mortgage rates like all current rates are lower than theyve been in most of U.S. history.
Even so, 30year mortgage rates often look higher than other rates youll see advertised.
You can generally find lower mortgage interest rates if you opt for:
- A shorter-termloan Shorterterm home loans have lower rates than 30year FRMs because investors dont hold the risk of carrying your debt for as long. However these loans have much higher payments, since youre repaying the same amount of money over a shorter time period
- An adjustable-rate mortgage Adjustablerate mortgages have a fixed interest rate for the first few years. Then, the rate can change with the market. These loans typically offer lower introductory rates than 30year loans. But that rate could rise later on, so you lower mortgage payment is not guaranteed to continue
Despite their slightly higher rates, most borrowers opt for a 30year fixed mortgage over a 15year FRM or an adjustablerate mortgage.
The stability and predictability that come with fixed rates and low payments are hard to beat.
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Which Is Better To Work With: A Bank Or A Mortgage Broker
A broker on the other hand, provides home buyers the advantage of having access to a number of rates offered by multiple lenders, and they do the legwork and negotiating for you to get the best available rate and terms.
Brokers dont always offer the same rates or products as the banks so it can be confusing for homeowners. RATESDOTCA has an easy-to-use mortgage rate comparison tool that shoppers can use to compare rates online from brokers, banks, credit unions, and other lenders at once.
Making A Mortgage More Affordable
There are a handful of ways to reduce the price tag associated with a mortgage. The first is tax breaks, where the interest you pay on your mortgage is tax deductible. Youll need to itemize your deductions to take advantage of this tax break.
You can also reduce your mortgage costs by putting 20% or more down. The more you put down, the less you have to borrow, which can reduce your monthly mortgage payment. Improving your credit score can also help if it allows you to qualify for a lower mortgage interest rate.
Lenders will scrutinize your and history, which may be problematic for twentysomethings who have little to no borrowing history. This is where having student loan debt actually helps youif youre making your payments on time, then youll likely have a good enough credit score for banks to feel comfortable lending to you. Generally, the better your credit score is, the lower your interest rates will be.
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Most Homeowners Don’t But That May Be A Mistake
Many people have become successful by standing out and going against the herd. Homeowners may achieve similar success by taking the same approach.
Only 1% of new mortgages fall into the “other” category, which includes the rarely used 20-year mortgage. The overwhelming majority of homeowners go the more standard 30-year route.
In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes discuss three reasons a 20-year mortgage may be best for new homebuyers and refinancers alike.
Kristine Harjes: If you’re considering a mortgage, you’re probably thinking, should I get a 30-year or a 15-year? If you’re like 90% of homeowners, you’re going to choose the 30 year mortgage, but say you don’t want to do 30 whole years of paying down a mortgage, but the 15-year has too high of a payment. There is actually something called a 20-year mortgage that allows you to get a little bit of the best of both worlds.
Harjes: As we’ve talked about, every little bit counts.
Hamilton: Yep. If you look at the actual savings, this is reason No. 2, is an example of buying a $309,000 mortgage. You’re looking at a savings of just above $91,000 over the term of that loan compared to a 30-year mortgage. Just for getting that lower rate of 25 basis points, or a quarter of a percentage point.
Harjes: Another point that we want to bring up is if you’re refinancing, this might be a very good option for you to consider.
Why Is It Harder To Get A Mortgage When You Are Older
If you retire before you have finished paying off the mortgage, you will not have a regular salary any more. Your income will usually go down, meaning lenders will be unsure if you will still be able to afford the mortgage repayments.
This means that offering you a mortgage is riskier as you get older. Lenders have to follow the Mortgage Market Review rules, which mean they have to make sure you can keep up with repayments over the full term of the mortgage.
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Pros & Cons Of Shorter
But shorter-term mortgages also have a catch: To tap into their interest savings youd need to make higher monthly mortgage payments.
Thats why 30-year mortgages remain the most popular loan type. Home shoppers who can easily afford a 20, 15, or 10-year mortgages higher payments may wonder about the savings a 5-year mortgage could provide.
Tips To Get The Lowest Mortgage Rate
To get the best rate possible, it helps to get your finances shipshape before applying for a mortgage.
For example, managing debts well and keeping your credit score up can help you qualify for a lower interest rate. As can savings for a bigger down payment.
Dont worry. Nobodys expecting miracles. But small improvements can make a worthwhile difference in the mortgage rate youre offered.
Here are some quick hits:
Few of us can afford to boost our savings and pay down our debts at the same time. So focus on areas where you think you can make the biggest difference. Youll see the biggest improvement in your credit scores by paying down highinterest, revolving credit accounts such as credit cards.
The other big way to lower your interest rate is by shopping around.
Mortgage lenders have flexibility with the rates they offer. Some will offer you lower rates than others because theyre more favorable toward your particular situation.
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What Is A Mortgage Preapproval
When youre shopping for a mortgage, you can compare options offered by different lenders.
Mortgage lenders have a process which may allow you to:
- know the maximum amount of a mortgage you could qualify for
- estimate your mortgage payments
- lock in an interest rate for 60 to 130 days, depending on the lender
The mortgage preapproval process may be divided in various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.
During this process, the lender looks at your finances to find out the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents and they likely run a credit check.
This process does not guarantee your approval for a mortgage.
Pour Every Bit Of Extra Cash Into Your Mortgage
Dedicate every windfall a bonus, raise, or holiday or graduation gift you receive toward paying down debt, recommends Marilyn Lewis in Money Talks News.
Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, dont even ask yourself what youll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.
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