10 Year Fixed Mortgage
A 10 year fixed rate mortgage seems to be an extreme financing choice, given the price of housing these days and the level of income it would take to support such a loan. The first requirement for a fixed rate mortgage at many lending institutions is a 20% down payment. While this is no longer a universal truth, a down payment of any less than 20% is going to result in a substantial mortgage payment increase, given the ten year amortization period.
Assuming that you can qualify for a 10 year fixed mortgage, the only way to analyze it is to look at the comparative options of longer mortgages at higher interest rates. Qualifying would be a challenge for many of us, particularly in the regions of the country where real estate values have skyrocketed. Many lending institutions insist that their home loans result in a household debt service of less than 40% of total income. The mortgage rates on a 10 year fixed rate loan are going to preclude many of us simply because of the immensity of the debt burden.
However assuming that you qualify, the question becomes whether or not a 10 year fixed mortgage is the reasonable choice. It is true that the shorter the life span of a mortgage, the lower the interest rate will be. On this particular day in May of 2007, the national average for a thirty year fixed rate mortgage is 5.90%. The average for a 10 year fixed mortgage is 5.49%. That's a substantial reduction. The average for a 20 year fixed rate mortgage is 5.84%.
It is also true that as you extend mortgage life, the value of the mortgage payment reduction is lessened. For example at 6% interest, extending the term from 10 years to 20 reduces the monthly payment by 35.5%. Extending it further to 30 years reduces the payment by only16.3%. However compacting what is traditionally a thirty year loan into ten years is going to run that monthly payment up the scale substantially, despite the reduction in interest rate.
Using the interest rates cited above, the monthly mortgage payment on a thirty year fixed mortgage would be $1779.41. The twenty year loan at the slightly lower interest rate would require $2121.69 per month. And the ten year fixed mortgage at 5.41% would cost $3242.43 each month. The difference in total interest cost is staggering, but does not take into account the tax deduction factor for mortgage interest. For people who can make maximum use of the mortgage interest tax deduction the difference in gross interest paid is not so great. But tax deduction aside, the difference in interest on a $300,000 loan between the ten year fixed mortgage and the thirty year loan (at the higher interest rate) is as follows:
10 year fixed mortgage at 5.41% interest: Total interest $89,091.92
30 year fixed mortgage at 5.90% interest: Total interest $340,587.43
Interest saved on a ten year fixed mortgage: $251.495.51