87% of home buyers across the country use a mortgage to finance their homes. One of the first important decisions you may have to make when buying or refinancing a property is whether you want a 10-year mortgage or a 30-year mortgage. While both options give a set monthly payment over a long period of time, there is more difference between the two than just how long it would take to pay off your mortgage.
But which is the best option for your need? Let’s look at the benefits and drawbacks of different mortgage durations so you can decide which option best suits your needs and overall financial goals.
Pros of a 30-Year Mortgage
A 30-year mortgage has a lower monthly loan payment than a 10-year mortgage. As a result of the smaller payment, home buyers are more likely to qualify for a bigger loan amount.
If the homeowner has other investments that provide higher yields than real estate, the monthly difference can be invested in those higher-yielding investments. Plus, on the first $750,000 of mortgage debt, you can also deduct mortgage interest expenditure you’re your income taxes as a homeowner. Paying mortgage debt gradually while gathering assets in a tax-advantaged retirement plan might help you multiply your wealth more quickly.
If you have stable employment and a great source of income, financing your property with a 30-year loan gives you a lot of options. An increase in the interest rates doesn’t affect the monthly payments. If interest rates fall, you can refinance into a loan with a shorter term and/or cheaper interest rate. And if you receive money as a result of an inheritance, work bonus, or other windfalls, you can use it to pay down your loan faster.
Cons of A 30-Year Mortgage
The benefit of one form of mortgage loan is the disadvantage of another. In some cases, the benefits discussed above can be considered downsides. For instance, lowering the cap on mortgage interest deductibility reduces the benefit. And if the stock market falls abruptly after you relentlessly invest near high values, you can use the money to complete your mortgage faster.
The flexibility of this loan mortgage payment plan can be both a blessing and a disaster, depending on your need. Making extra payments while keeping the longer-term loan can be a wise decision for individuals who are diligent. However, many people find ways to spend the extra money they have lying around, and for these people, a shorter-term loan that grows equity faster can be a smart decision.
Pons of A 10-Year Mortgage
Home buyers who can afford the somewhat higher monthly payment associated with a shorter-term mortgage will benefit greatly. Some of the benefits of a 10-year home loan include:
Lower Interest Rates: While both loan options have comparable interest rate profiles, the 10-year loan usually has a lower interest rate than the 30-year loan. The spreads fluctuate over time; the 10-year option is normally priced one-fifth to one-tenth of a percent lower than the 15-year home loan option.
Build Faster Home Equity: Historically, homeowners in the United States refinance their homes or relocate every 5 to 7 years. After the Great Recession, this period was extended to nearly 10 years. When a homeowner extends their loan payments to 30 years, they build just a small amount of equity in their house during the early years of their loan. On the other hand, a homeowner who pays off a home in a 3rd of the period is not making a threefold payment. Other expenses of ownership include property taxes, maintenance, insurance, etc. These extra expenses can account for up to one-third of the average monthly payment on a 30-year mortgage.
Early Repayment Charges: One of the most important factors you may want to consider with a 10-year mortgage is that your arrangement will include early repayment penalties. These fees are frequently significant, and it is not uncommon for you to pay between 4-7% of the amount of the mortgage if you repay the loan during the period of the fixed rate. On a $500,000 mortgage, this equates to between $20,000 and $35,000.
Cons of A 10-Year Mortgage
Higher Payments: Since you only need 10 years to complete a 10-year fixed mortgage, the monthly payments are higher than a 30-year mortgage. This may limit your ability to maintain cash on hand and force you to make only the minimum monthly payment.
Smaller loan: The monthly loan payments on a 10-year mortgage are higher than those on longer-term loans like the 15-year and 30-year mortgages, so you may be unable to borrow as much money as you could with a longer-term loan.
Should you opt for a 10-year mortgage or a 30-year Mortgage?
There’s a reason why 30-year mortgages are more popular among homeowners: they have lower monthly payments and might provide more spending power. While 10-year mortgages have significant benefits, particularly in terms of paying less overall interest, the larger monthly payments may be tough for most people to handle.
However, if you later opt for a 30-year mortgage, strive to make extra payments on your loan each year if possible. You can either arrange a quicker total payment schedule or simply make an extra payment anytime you have extra cash. In any case, these extra payments will save you money on interest and can help you pay off your mortgage faster and perhaps make you benefit from both options.
Commercial Loan Mortgage in Phoenix
Are you considering a commercial loan mortgage in Phoenix? Blake Mortgage is your go-to mortgage brokerage. For several years, they have helped businesses in Phoenix, Arizona finance the purchase of valuable real estate properties for commercial purposes. They are a mortgage broker with in-depth knowledge of the Phoenix commercial real estate market. So, if you are ready to apply for a commercial loan Mortgage in Phoenix, they are ready to offer you financing tailored to your specific mortgage needs and budget.