10-year mortgage rates: What to expect

Imagine owning your home outright in just a decade, freeing up your finances for other dreams and investments. This enticing prospect is driving many potential homeowners to consider a 10-year term on their mortgage. But what exactly is a 10-year mortgage, and how do its rates compare to more traditional loan terms?

In this article, we'll delve into the specifics of 10-year mortgages, explore the benefits and drawbacks, and help you determine if this accelerated path to homeownership is the right fit for you.

What is a 10-year mortgage rate?

A 10-year mortgage rate is the interest rate on a loan that must be repaid within ten years, resulting in higher monthly payments but significantly less total interest paid compared to longer-term loans. Most often, you’d see a 10-year term on a fixed-rate mortgage. With a fixed-rate mortgage you lock in an interest rate at the start of the loan’s term and pay the same rate over the course of the loan.

Securing a good mortgage rate is crucial because it lowers total interest costs and makes monthly payments more affordable. The savings from a lower interest rate can be redirected towards other investment opportunities, enhancing your long-term financial health.

What factors determine your 10-year fixed mortgage rate?

Understanding the various factors that can influence your 10-year mortgage rate is essential for securing the best possible terms for your loan.

• Credit score: A higher credit score generally results in a lower interest rate, as it indicates to lenders that you are a lower-risk borrower. Conversely, a lower credit score can lead to higher interest rates, increasing the overall cost of the loan.
• Down payment: A larger down payment generally leads to a lower interest rate. It increases the borrower’s equity in the home, which reduces the lender’s risk. In contrast, a smaller down payment may result in a higher interest rate and potentially require private mortgage insurance (PMI).
• Loan-to-value ratio (LTV): The loan-to-value (LTV) ratio measures the loan amount relative to the appraised value of the property. A lower LTV ratio can result in a more favorable interest rate, while a higher LTV ratio may lead to higher rates or additional requirements like private mortgage insurance (PMI).
• Market factors: Market factors, such as the overall economic environment and the federal funds rate, significantly influence 10-year fixed mortgage rates. Changes in the federal funds rate, which is set by the Federal Reserve, can lead to corresponding adjustments in mortgage interest rates, affecting the cost of borrowing.

How to get the best 10-year mortgage rate

In this section, we'll explore strategies for securing the best 10-year mortgage rate, providing you with practical tips and insights to help you obtain the most favorable terms for your loan.

Improve your finances

Improving your finances can significantly enhance your ability to qualify for a favorable mortgage rate. Lenders assess your financial health to determine the level of risk they are taking on, and stronger financial stability typically translates to better loan terms. One of the key components of financial health is your credit score, which can be improved through several specific actions:

• Consistently making timely payments on all your bills, including credit cards, utilities, and loans, helps build a positive payment history, which is a major factor in credit scoring.
• Lowering your overall debt, particularly high-interest credit card balances, improves your credit utilization ratio, another critical element in your credit score calculation.
• Limiting the number of new credit applications minimizes hard inquiries on your credit report, which can temporarily lower your score.
• Regularly reviewing your credit report for inaccuracies and disputing any errors can prevent unwarranted negative impacts on your credit score.
• Keeping older accounts open, even if they are not actively used, can contribute positively to the length of your credit history, benefiting your overall score.

By focusing on these areas, you can strengthen your financial profile and increase your chances of securing a lower 10-year mortgage rate.

Make a large down payment

Making a large down payment can significantly improve your ability to qualify for a favorable mortgage rate because it increases your equity in the property. This demonstrates a strong financial commitment to the property and lowers the likelihood of default.

Additionally, a substantial down payment can help you avoid private mortgage insurance (PMI), which further reduces your overall loan costs. The combination of decreased lender risk and increased equity makes you a more attractive borrower, thereby enhancing your chances of securing a competitive mortgage rate.

Compare lenders and options

Comparing lenders is important, but for the most favorable loan, you’ll want to do more than simply compare lenders by their rates. Consider their reviews, communication, flexibility, technical capabilities and transparency, along with their rates and terms. By evaluating different interest rates, loan terms, conditions and other qualities from various financial institutions, you can identify the most compelling offers.

This thorough comparison helps ensure you make an informed decision that aligns with your financial goals and circumstances, rather than settling for the first offer you receive.

Should you get a 10-year fixed mortgage?

Evaluating the benefits and drawbacks of a 10-year mortgage is crucial for determining if it aligns with your financial goals and circumstances. The primary advantage is the accelerated payoff period, which significantly reduces the total interest paid compared to longer-term loans, leading to substantial savings and faster equity building. Additionally, the typically lower interest rates on 10-year mortgages can further decrease overall loan costs.

However, the higher monthly payments required by a 10-year mortgage can strain your budget and limit financial flexibility. It is important to assess whether you can comfortably manage these payments without affecting other financial goals or emergency funds. By thoroughly weighing these pros and cons, you can make an informed decision on whether a 10-year mortgage fits your financial situation and long-term plans.

10-year mortgage pros

Considering the numerous advantages, here are the key benefits of taking out a 10-year fixed mortgage:

• Accelerated homeownership: You own your home outright in just 10 years, freeing up your finances sooner.
• Lower total interest: Significantly less interest paid over the life of the loan compared to longer-term mortgages.
• Faster equity building: Higher monthly payments contribute more towards principal, increasing your home equity quickly.
• Potential for lower interest rates: 10-year fixed mortgages often come with lower interest rates than 15 or 30-year loans.
• Financial stability: Fixed monthly payments provide predictability and help with budgeting.

10-year mortgage cons

While a 10-year fixed mortgage offers many benefits, it’s important to also be aware of the potential drawbacks associated with this type of loan:

• Higher monthly payments: The shorter loan term results in significantly larger monthly payments compared to longer-term mortgages.
• Reduced financial flexibility: Higher payments may strain your budget and limit your ability to save for other goals or handle unexpected expenses.
• Qualification challenges: The increased monthly payment amount may make it harder to qualify for the loan, especially for those with lower incomes.
• Opportunity cost: The money allocated to higher mortgage payments could be invested elsewhere, potentially yielding higher returns.
• Potential for overextending: Committing to high payments might lead to financial stress if your income decreases or expenses rise unexpectedly.

Locking in your 10-year mortgage rate

You can lock in your mortgage rate after receiving your approval. This can protect you from potential rate increases, ensuring that your monthly mortgage payments remain affordable and predictable.

Some may prefer to lock in their interest rate early in the process to protect themselves from rate increases and to know sooner what their monthly payment will be. Others may want to float their rate, believing rates will go down before they close. Your lender can help provide insight and their recommendations so you can make the best choice for you.

Alternatives to a 10-year fixed-rate mortgage

When considering a mortgage, it is important to explore various alternatives to a 10-year mortgage to find the option that best suits your financial needs and goals.

• 10-year adjustable-rate mortgage (ARM): A 10-year ARM offers a fixed interest rate for the first ten years, after which the rate adjusts periodically based on market conditions, potentially leading to lower initial payments compared to a fixed-rate mortgage.
• 15-year mortgage: A 15-year fixed-rate mortgage provides a balance between shorter and longer loan terms, offering lower interest rates and faster equity building than a 30-year mortgage, with more manageable monthly payments compared to a 10-year mortgage.
• 30-year mortgage: A 30-year mortgage spreads the loan payments over a longer period, resulting in lower monthly payments but higher total interest paid over the life of the loan, providing greater financial flexibility for borrowers.
• Government-backed mortgage: Government-backed mortgages, such as FHA, VA, and USDA loans, offer benefits like lower down payments and more lenient credit requirements, making them accessible options for borrowers who may not qualify for conventional loans.

The bottom line

A 10-year fixed-rate mortgage is an attractive choice for borrowers aiming to pay off their mortgage quickly, provided they can manage the higher monthly payments. However, this option may not suit every homeowner's financial situation. It’s important to explore various home loan options and payment strategies. Refinancing to a 10-year mortgage in the future is also a viable option once you are confident in your ability to afford the increased payments. If you feel ready to start your mortgage application, consider beginning the process online today to take the first step towards securing your home.