10-Year Mortgages vs. the 30-Year Fixed: Which Is Better?

September 20, 2011 8 Comments »
10-Year Mortgages vs. the 30-Year Fixed: Which Is Better?

It’s time for another mortgage match-up folks. Today, we’ll look at 10-year mortgages versus the 30-year fixed mortgage to see how they stack up.

Before we get started, it’s important to note that there are two very different types of 10-year mortgages out there.

Two Types of 10-Year Mortgages

There are 10-year fixed mortgages, which have a mortgage term of 10 years. Yep, just a decade and they are paid off in full.

Then there are 10-year adjustable-rate mortgages, which have a term of 30 years. Huge difference for a number of reasons.

The first type of mortgage is pretty straightforward. It’s similar to a 30-year or 15-year fixed mortgage, only shorter. As mentioned, the loan duration is just 10 years.

What this means, if you happen to be brave enough to go with the loan program, is that your monthly mortgage payment will be quite high since you only get 120 months to pay it off.

After all, if you only get 10 years to pay off your entire mortgage balance, as opposed to 30, you’ll need to come up with some sizable monthly payments to get it down to zero in a hurry.

However, doing so will save you a ton of money in interest. And that’s exactly why someone would choose this type of mortgage. To save lots of money! But most folks probably can’t afford such high payments, or simply don’t want to pay down their mortgage that aggressively.

The “other” 10-year mortgage you’ll see out there is the “10/1 ARM,” which is fixed for the first 10 years, and annually adjustable for the remaining 20. Put simply, it’s a 30-year loan with an initial 10-year fixed period.

This makes it a hybrid ARM because of its fixed/adjustable nature. It also means the monthly payments have the ability to adjust both higher and lower once those first 10 years are up.

We’re basically talking about two loan products on opposite ends of the spectrum. One that pays down the entire loan balance in a third of the time (typically it’s 30 years), and one that’s an ARM, which some consider higher-risk than traditional fixed mortgages.

So, are either loan programs a better choice than the classic 30-year fixed mortgage? Let’s see.

10-Year Fixed Mortgages Only Last Ten Years

10-year fixed

If you’re really, really serious about paying off your mortgage fast, this could be the loan for you.

Just note that your mortgage payment will be huge relative to other, more traditional options that give you more time to pay off your balance.

For example, on a $250,000 loan amount, a 10-year fixed mortgage with an interest rate of 3% would come with a monthly mortgage payment of $2,414.02.

Compare that to a monthly payment of $1,787.21 on a 15-year fixed at 3.5%, and a payment of $1,193.54 on a 30-year fixed at 4%. It’s about double the 30-year payment.

Notice how I even factored in the lower mortgage rate afforded to the 10-year fixed and 15-year fixed and the payment is still significantly higher.

Well, while the payment on the 10-year fixed is quite a bit higher, you’d only pay about $40,000 in interest over those 10 years.

On the 15-year fixed, you’d pay about $72,000 in interest, and on the 30-year fixed you’d pay nearly $180,000 in total interest. Yes, you read that right. Nearly five times the amount of interest!

So that illustrates why someone would opt for the shorter term 10-year fixed. A lower mortgage rate and much less interest paid. And a home that is free and clear much more quickly, if that’s your goal.

But it only makes sense if you really want to pay off your mortgage fast, and have the means to do it without breaking the bank.

10-Year Mortgage Rates Are Lower

Speaking of rates, let’s talk about what you might expect to receive on a 10-year fixed loan. First, not all lenders offer the program. It’s somewhat of a specialty loan program.

It’s certainly not as common as a 30-year or 15-year fixed. So once you find a lender that does offer the loan, you might see that 10-year mortgage rates are an .125 (eighth) better than a comparable 15-year fixed. Maybe a quarter lower…

In other words, if the 15-year fixed is priced at 3.25%, the 10-year fixed mortgage rate might be offered at 3.125% or 3%. It’s not going to be a huge difference.

Some lenders may not even price the two types of loans differently. The only difference might be lower closing costs on the 10-year fixed.

Meanwhile, a similar 30-year fixed might go for 3.875%, so you’re looking at about a .75% discount, more or less. That’s significant.

Tip: The difference in rate between a 15-year fixed and 10-year fixed may be marginal or even nil, so taking the longer term on the 15-yr could provide you with some much needed breathing room. You can always make larger payments each month to pay it down quicker.

10-Year ARMs Are a Different Beast

10-year ARM

Here’s where things can get confusing, or even misleading. Many mortgage companies advertise 10-year ARMs as if they’re fixed mortgages, which just isn’t the case. Or at best half the story.

They basically use that initial 10-year fixed period to their advantage when putting together marketing materials.

And mortgage lenders can make 10-year ARMs appear really attractive by touting the low mortgage rates that accompany them.

After all, an ARM will always be priced lower than a 30-year fixed mortgage. So you can see why a customer may think the 10-year ARM is the better choice hands down.

But the fact of the matter is that these loans are still adjustable-rate mortgages in fixed-rate clothing. And when it comes down to it, they generally aren’t that much cheaper than a traditional 30-year fixed.

In fact, the interest rate may only be .125% or .25% cheaper because 10 years is a long time to offer a fixed rate. On the other hand, most folks don’t keep their mortgages for a decade, so it could make sense and save you some dough.

But if you’re not comfortable with a loan program that may adjust higher in the future, steer clear. The savings may not be worth the stress.

However, if you plan to move within 10 years (or refinance for some reason), going with a 10-year ARM will provide you with a fixed rate for a significant period of time while you figure things out.

In summary, pay close attention so you know which type of 10-year mortgage you’re actually getting…

Read more: 30-year vs. ARM

8 Comments

  1. Stormy June 25, 2013 at 8:21 am -

    Thanks for pointing out the difference between a 10-year fixed and a 10-year ARM. I certainly wouldn’t want a 10-year fixed, the payments would be much too large. But the 10-year ARM could be a good fit, seeing that I may sell my home well before that.

  2. Rod Jones November 2, 2013 at 3:16 am -

    I’ve been seeing a lot of commercials and advertisements for the 10-year fixed mortgage lately. I think it’s a sales gimmick to advertise a lower rate. But people don’t realize the monthly payment is much, much higher because of the shorter term.

  3. Colin Robertson November 3, 2013 at 12:11 pm -

    Yep…I’ve seen the same. I think Greenlight and CashCall both have been advertising 10-year fixed loans as an alternative to the 15-year and 30-year because the rate is cheaper. They don’t mention anything about the payment, which most people probably can’t even qualify for. And not everyone wants to pay off their mortgage in a decade, despite it sounding nice.

  4. Molly November 7, 2013 at 6:51 am -

    I’ve been seeing a ton of ads on TV for the 10-year fixed. It sounds like a great low rate until you realize you have to pay off your mortgage in full in a decade…

  5. Allison January 17, 2014 at 10:20 am -

    My lender tried telling me I was getting a 10-year fixed loan, but in reality it’s an adjustable-rate mortgage that will reset higher in 10 years. False advertising! Hello!!

  6. Colin Robertson January 20, 2014 at 9:24 pm -

    Yep, this is a pretty common tactic nowadays. It is true that a 10/1 ARM is fixed for the first 10 years, but that only tells you a third of the story. Those other 20 years on the 30-year loan need to be mentioned as well.

  7. Jeff February 2, 2015 at 4:54 pm -

    10 year Fixed….perfect way for a 50-something to pay off the house and enter retirement …Debt Free!!!!

  8. Colin Robertson February 3, 2015 at 10:52 am -

    Jeff,

    Interesting angle and very true for someone even getting a late start.

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