Understanding Fixed 10 Year Mortgage Rates
Ten Year Home Mortgage Loan vs Early Mortgage Payoff on 30 Year Loan
Aug 12, 2009
Having an interest rate that doesn't change over the course of the mortgage loan gives some home buyers peace of mind. While a fixed rate mortgage often starts off at a higher interest rate than an adjustable rate mortgage, it's not subject to the market fluctuations that could be impacting your income, as well. One of many disastrous factors in the mortgage crisis of 2009 was declining home values accompanied by lower wages and higher rates of unemployment. Imagine having your house payment go up the same month that you find your hours cut, or become laid off.
10 Year Mortgage Rates
Many people tend to purchase the biggest house they're approved for, and want the lowest payment possible, but never stop to calculate the total cost of the mortgage, or the financial consequences of a longer term loan. Using an online mortgage calculator to compare the rates of a ten year home mortgage and thirty year mortgage loan is very helpful.
While the rates for a short term loan tend to be lower than the rates for a longer term loan, many homeowners believe the “bottom line” lies in their monthly payments, and not the overall cost, based upon the mortgage rate projections. Even homeowners who intend to pay off their mortgage faster, can end up in foreclosure when they fail to build up an emergency reserve fund.
Ten Year Home Mortgage Loan
Buyers who are eligible for a 10 year loan, and have enough income or assets to protect themselves from foreclosure, benefit greatly from a short term home loan. According to the mortgage calculations of KJE Computer Solutions, LLC, a $200,000 mortgage, at a 6% interest rate, ends up costing most buyers $431,680 or more than twice the value of the home. Paid over ten years, though, the same home, at the same interest rate, costs a total of roughly $266,449 which is considerably less. The monthly payment, however is much higher. For ten years, the payment is $2220, compared to the 30 year payment of $1199. Put another way, the payment is nearly twice as much, but there are only 1/3 as many payments.
The Dangers of Early Mortgage Payoff Plans
Deciding to choose a ten year loan, carries a slightly lower interest rate, but a lot more risk. An unplanned emergency that causes a decline in income or resources, can spell disaster. The higher payments can be more difficult to keep up with. Building up equity is a good thing, but when trouble strikes, and homeowners are unable to access that equity, they need a safety net. Early mortgage payoff is a good plan, as long as a sufficient safety net is in place.
When to Choose a 30 Year Loan
An alternative, and one chosen by Kris and JD Roth of Get Rich Slowly, is to purchase the 30 year loan and make the ten year payments, for an early mortgage payoff. In the $200,000 example quoted above, that doesn't reflect a variation in interest rates, that would result in an overall cost of 266,463 which is only $14 more than if they had purchased the 10 year loan. $14 is a much smaller risk, when compared to the prospect of losing the house because of unexpected financial setbacks. In times of trouble, temporarily paying the minimum monthly payment of $1199 is a much easier pill to swallow than losing the house.
Early mortgage payoff is a smart decision, but having a safety net may be smarter. Choose a ten year mortgage loan only when there's no possibility of hardship. Even with a slightly lower mortgage rate, the security of protecting the investment can't be underestimated.
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