While the majority of mortgage loans extend for 30 or 15-year terms, homeowners who want to pay off their loan faster can take advantage of a 10-year mortgage.
"We do a lot of 10-year loans and even nine and eight-year loans, but these are predominantly for refinances rather than purchase loans," says Bill Banfield, vice president of Quicken Loans in Detroit.
Banfield says the main reason homeowners choose a 10-year home loan is that "they don't want to go backwards" by refinancing into another 15 or 30-year loan when they have already paid their mortgage for years.
Who chooses a 10-year mortgage?
Recent data from the Mortgage Bankers Association says that fixed-rate loans for terms other than 30 or 15 years, primarily 20 or 10-year mortgage loans, represented 18 percent of all refinances (an increase of 57 percent from the previous year). During that same period, just 1.6 percent of purchase loans were for fixed-rate mortgages with terms other than 30 or 15 years. That low percentage is 23 percent higher than it was the previous year.
Fewer borrowers opt for 10-year mortgages for home purchases because the monthly payments are higher due to the compressed repayment period. Shorter-term loans tend to be more popular when mortgage rates are low because the low interest rate can help offset some of the higher costs associated with the shorter loan term.
Why choose a 10-year mortgage?
"Ten-year loans are meant for a very specific audience, either people who have been in their home a long time, such as 18 years and have only 12 years left on their mortgage, or homeowners who started with a shorter term loan to begin with," says Keith Gumbinger, vice president of HSH.com in Riverdale, New Jersey.
While interest rates vary, 10-year mortgage rates are typically about one-quarter of one percent lower than the rates on a 15-year loan, says Gumbinger. However, those lower rates may not be enough to offset the shorter term. For example, on a $200,000 15-year fixed-rate loan at 3 percent, you would pay $48,609 in total interest, but with a 10-year loan at 2.75 percent, you would save $19,623 in interest and five years of loan payments. However, your monthly payment would be $527 higher.
"In spite of the higher payment, there's a big advantage to paying off your mortgage balance quickly, especially if people want their mortgage gone by the time they retire," says Banfield.
Banfield says that some homeowners opt for a 10-year cash-out refinance to make home improvements without extending their loan repayment term. Also, downsizing homebuyers who make a significant down payment on their new home may choose to finance the balance with a shorter-term loan, says Gumbinger.
Qualifying for a 10-year loan
Banfield says that qualifying for a 10-year loan requires the same creditworthiness and documentation as a 30-year mortgage. However, the higher monthly payments do require borrowers to have sufficient income to repay the loan and to meet a lender's maximum debt-to-income ratio requirement, typically 43 percent.
How much do I need to earn?
For example, on a loan balance of $160,000 (assuming 20 percent home equity in a $200,000 home), $79,999 in income is required for a 10-year loan at 2.75 percent interest, 29 percent more than the $61,928 needed for a 15-year loan, says Gumbinger.
Alternatives to a 10-year mortgage
Even if the idea of paying off your mortgage in a decade is appealing, the higher monthly payments may make it impossible to qualify for the loan or you may just not want to tie yourself to the inflexibility of 10 years of high payments.
"People at their peak earning years may feel confident about their ability to handle a 10-year loan, but I always caution people to be fully prepared for the unexpected turns life can take," says Brian Koss, executive vice president of the Mortgage Network in Boston. "Equity is great, but you can't eat it. If your income drops or you suddenly have to take care of your parents or pay for a big wedding, it can be tough to keep up those payments."
Koss recommends taking out a 15-year loan and setting cash aside to make extra payments if you’re able.
"The one drawback to a 10-year loan is that you're hamstrung by the payments and lack budget flexibility," says Gumbinger. "You're committing more of your money to an illiquid asset. While involuntarily paying down your mortgage with a short loan can be good for some people, if you have the discipline to make your own extra payments that gives you greater control."
Shop around for a 10-year loan to compare mortgage rates and fees and check out the "It's My Term" prepayment calculator to see if you can achieve your monthly payment and loan payoff goals through prepayments.