What Is A 10
A 10-year mortgage usually means your home will be fully paid off in 10 years, as opposed to the more typical 15- to 30-year mortgages. This means youâll make higher monthly mortgage payments, but youâll pay less interest in the long run.
The main option for a 10-year loan is the traditional 10-year fixed-rate mortgage. Youâll pay the same amount in principal and interest each month to your bank and after 10 years, youâll own your home free and clear. No more mortgage payments. Whoaâ¦ let that sink in.
Another option that isnât technically a 10-year mortgage is the 10/1 ARM. While this loan lasts a full 30 years, the initial interest rate remains the same for the first 10 years. After that, it can change annually for the next 20 years. Which is best for your depends on your personal goals for the future and your monthly budget.
They Cost Much Less Than Other Mortgages
Many people ask the wrong question when they buy a home: “How much is the monthly payment?” What they really should ask is: “How much is the total cost of the loan?”
Its true: 15-year fixed-rate mortgages have higher monthly payments than 30-year loans. But when you crunch the numbers and look at the total cost of the loan, the difference between the 15-year and 30-year mortgages is staggering.
Lets say you plan on borrowing $250,000 for a new home, and youre trying to decide between a 15-year or 30-year mortgage:
- The monthly payment for a 15-year fixed-rate mortgage at 3.6% interest is $1,745.
- If you go with a 30-year fixed-rate mortgage with a 4.3% interest rate, the monthly payment comes out to $1,293.
- Youd save $452 each month on monthly payments with the 30-year loan, but thats just half the equation.
- Choosing the 30-year mortgage because of the lower monthly payment will end up costing you $97,000 more than if you went with a 15-year mortgage!
Why? Because of the total interest you will pay over the life of the loan. You could almost buy a whole separate house with the money you can save by choosing a 15-year loan!
Check out our mortgage calculator to find out how much of your monthly mortgage payment is going to principal and interest.
When Should I Consider A 15
15-year refinance loans typically have a lower rate than a 30-year loan. A 15-year mortgage refinance can be a good way to pay off your mortgage sooner and save on interest. So the best time to consider refinancing is when rates are low enough that your interest savings will outweigh the upfront closing costs associated with a refinance loan.
For homeowners with more than 15 years left on their mortgage, a 15-year loan is a great way to potentially secure a lower rate without adding years to your repayment schedule.
Because the monthly payments on a 15-year mortgage are higher, refinancing to a shorter-term loan makes the most sense if your income has increased since purchasing your home.
So before you commit to bigger monthly payments make sure your current financial situation can support them.
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Dont Forget About Retirement
Hows your retirement fund? Check on this and see if youre currently contributing enough. Instead of refinancing to a 15-year mortgage, you may be better off putting more money toward a 401 plan or an IRA account.
You also want to make sure youre maximizing your tax benefits in these and other types of programs, like health savings accounts and 529 college savings accounts. Compared to these plans, paying down a low-rate, potentially tax-deductible debt like a mortgage is a low financial priority.
Reasons To Consider Switching To A 15
Most homeowners make payments on mortgages with 30-year fixed rates. Theres nothing wrong with that plan, but you might be interested in other options. It may make more sense to refinance and switch to a 15-year mortgage. Lets look at five reasons why:
Youll Own Your Home Faster
Cutting the time in half for paying off your home loan means you own your home faster. Of course, you make higher monthly payments, but the payments dont last as long. This option makes sense if you want to get rid of all your debt by a certain age, such as the age you plan to retire.
You May Lower Your Interest
Since interest adds up over time, you pay more interest over the life of a longer loan. You may also find as you research the refinance process that you can qualify for a lower interest rate, and a lower rate also saves a hefty amount over time.
Your Income Level Changed
If you or your spouse has gotten a new, higher paying job, the smart next financial step is to pay off your debt. The fastest way to do that is through refinancing. With a 15-year mortgage, you can beef up your home equity in less time.
Mortgage Rates Are Low
If you havent heard, home mortgage rates have hit an all-time low, and rates for 15-year mortgages are already a little lower on average than 30-year mortgages. Currently, the 15-year mortgage rate is around 3.65 percent. Check your interest rate to see how much youre paying to help you decide if a refi makes sense.
Youre Ready to Budget
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Should You Refinance To A 15
The main difference between a 15- vs. 30-year mortgage is how long itll take you to pay off your mortgage. As the names suggest, a 15-year mortgage will take 15 years to pay off, while a 30-year mortgage will take 30 years.
With a shorter loan term, youll save money in the long run, but your current monthly payment will be higher. And, as with many refinances, youll also have to pay closing costs to refinance from 30 to 15 years.
Its important to know that everyones situation is different, and that a refinance may not be the best option for you at this time. The best way to determine if its a good time to refinance to a 15-year loan is to speak with a mortgage expert who can review your information. Theyll help you to see if its the right loan, or they may suggest alternative loans that may be a better fit for your financial goals.
Most Homeowners Benefit From A ‘super
Adcock’s point of view isn’t actually unpopular. Financial experts agree that the flexibility of lower monthly mortgage payments is important for many homeowners.
“I’ve explained it to clients this way,” says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. “If you had a 15-year mortgage and a 15-year super-duper flexible mortgage, which one do you think you would choose?”
Most them then ask what a “super-duper flexible” mortgage entails. “If you need cash, the payments can drop 20% if you want any time you want,” he says, “and the rate is only about a quarter of a point higher” than the typical 15-year loan.
The punchline, La Spisa says, is the “15-year super-duper flexible mortgage” is a 30-year mortgage that, like Adcock suggested, you pay back more quickly as your finances allow.
When your financial situation allows, you can put extra money toward your balance and pay off the loan faster as Adcock put it, turning it into a 15-year. But when money is tight, then you can take advantage of the 30-year’s lower payments and use the difference to help with other bills, says Greg McBride, chief financial analyst for Bankrate. You’re not locked into that large payment.
“Money in the bank will pay the bills home equity will not,” McBride says.
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Pay Off Your Home Prior To Passing
If youre older and dont expect to live 30 more years, Mescher says you should look at a shorter-term mortgage if you want to leave your home to your children free and clear of debt. A 15-year mortgage allows you to pay off your home debt faster, and increases the likelihood that youll own 100% of your home prior to your passing.
Of course, if youre buying a home that you dont expect to live in until the end of your life, this may not be a concern. But even then, youll still have more equity in your home with a 15-year mortgage if you decide to sell it in your later years.
What Is A Mortgage Rate Lock
A mortgage rate lock allows you to lock in the interest rate your lender quotes you for a certain period of time. This gives you a chance to close on the loan without risking an increase in the mortgage interest rate before you finalize the loan process.
Once you find a rate you like, lock it in as soon as possible because rates can change overnight. If they rise, then you could end up paying more on your mortgage.
If you get a floating rate lock, then you can lock in a lower interest rate if rates fall, but you wont be obligated to pay higher interest rates than you were quoted if they go up.
While 30-day rate locks are typically included in the cost of a mortgage, a floating rate lock could cost extra. Depending on how volatile the rate environment is, you might find that a floating lock is worthwhile.
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Serious Savings Are Possible When You Combine One Of Today’s Low Rates With A Shorter Term
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LOS ANGELES, Sept. 14, 2021 /PRNewswire/ — Lendgo– Why do popular finance experts Clark Howard and Suze Orman urge people to switch to a 15-year fixed loan? They understand how a shorter term and a lower rate combine to bring irresistible savings. Popular quote comparison site Lendgo reports an uptick in people exploring shorter terms.
“Let’s run through the advantages of a shorter-term loan,” says Orman. “For starters, the interest rate is lower. â¦ Because of the lower interest rate and the shorter payback period, you owe a lot less interest on a 15-year, over the life of the loan.”
Savvy homeowners see beyond lowering their monthly payment when rates are as low as they are now. They avoid adding tens of thousands of dollars to their mortgage and, instead, slash many expensive years off the term while keeping their payment about the same.
Nobody knows how long this golden age of low rates will last. Look into what you can gain by refinancing today.
Save a Lot of Money Without Adding YearsThe rates on 15-year loans are lower than other terms. Homeowners who seize these rates to swap their long mortgage for a short one can save tens of thousands of dollars in interest!
Seize the opportunity to shorten your term and save HUGE on interest.
But How To Pay The Extra Amount
It would be nice if that $555 in monthly savings was in your pocket from the beginning. But its not. Its the savings youll see after the loan is paid off.
The main difficulty with a 15-year loan is increasing your monthly payment. In the above case, its by $466. Putting that $555 monthly savings into the mortgage would more than pay for it.
But where do homebuyers get money now so they can afford a much higher mortgage each month for the next 15 years?
Because less than 10 percent of homeowners have 15-year mortgages, Bechtel says its not an option for everyone, mainly because of the higher payments.
Its not for the faint of heart, he says.
Borrowers should make sure they have enough income to afford it, are able to manage their household debt, and have money in liquid savings for emergencies, he suggests. This is mainly why 15-year mortgages are more of a refinancing option, says Bechtel, who bought his house with a 30-year loan and later refinanced into a 15-year loan that now has six years remaining.
If Im going to swallow a bigger monthly nut, knowing that Ill save a ton of money in the long run, Bechtel says, a borrower needs confidence in their job prospects or have enough money in savings to cover the higher mortgage if they lose their job or their salary drops.
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What Are The Differences Between 15
A 15-year mortgage’s monthly payments are higher than a 30-year mortgage, often significantly higher. A 30-year mortgage allows a borrower to stretch out payments over a long time and keep more of their monthly earnings. A 30-year mortgage has a higher interest rate than a 15-year mortgage, and you will pay more in interest rather than principal payments on a 30-year mortgage.
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How To Get A Low 15
If you want to lower the cost of homeownership, you can start by finding a way to lower your mortgage rate. The higher your mortgage rate, the more interest youll pay over the life of your home loan. Thats why its important to compare mortgage rates before committing to working with a specific lender.
The homebuyers who qualify for the lowest mortgage rates tend to have good credit scores. According to the FICO scoring model, youll likely need to have a credit score of at least 740 if you want access to the best rates. Of course, the exact credit score youll need to qualify for a 15-year fixed-rate mortgage will depend on the mortgage lender you choose to work with.
If your credit score isnt as high as it could be, it might be a good idea to work on improving your credit before you apply for a mortgage. Eliminating debt, paying bills every month on time and in full and keeping your below 30% are all things you can do to boost your credit score and put you in the best position to get a favorable mortgage rate.
While its possible to qualify for a mortgage with a low credit score , itll be more challenging and could result in a high interest rate. If this is your situation, your best bet might be to go for an FHA loan or a USDA loan. The former is designed for first-time homebuyers, while the latter is built for those buying a home in a rural area.
Advantages Of Refinancing Into A 15
Rajeh Saadeh, a real estate attorney, professor and investor in Somerville, New Jersey, says the benefits of refinancing to a 15-year loan are plentiful.
Lenders often charge a lower interest rate for a 15-year mortgage than a 30-year mortgage. In addition to lowering your interest rate, you will create a more aggressive paydown schedule, which can save you thousands in interest in the long run, he says. Also, youll build equity more quickly, which youll be able to tap via a future home equity loan, home equity line of credit or cash-out refinance if you need extra money.
Paul Buege, president/COO of Pewaukee, Wisconsin-based Inlanta Mortgage, notes that your monthly payment may not necessarily increase when moving from a 30-year to a 15-year mortgage loan.
You may actually be able to reduce your monthly payment, depending on the size of your current mortgage and how much lower the new rate is compared to your current mortgage rate, says Buege.
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What Is The Average 30
As of July 16, 2019, the average interest rate for a 30 year mortgage is 3.83% with an annual percentage rate of 3.95%, according to bankrate.com. With a 30-year fixed loan, youâll pay off your house in 30 years and your monthly principal and interest mortgage payment with stay the same each month. Interest rates are highly dependent on your own credit score, your location, and other situational factors, so ask your preferred lender for your most current rate, or visit the Consumer Finance Protection Bureau.
Why Should I Get A 15
If you can afford the larger monthly payment that comes with a 15-year fixed mortgage, it can help you pay off your home, freeing up funds for retirement. You will spend less in interest over the life of the loan compared to a 30-year mortgage, and usually, a 15-year fixed mortgage means a better interest rate.
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