A few years ago my husband and I refinanced our house into a 10-year mortgage. And It’s odd to me that no one talks about these shorter mortgages much. When buying a house or refinancing, you hear a ton about 30-year loans and 15-year loans, but rarely about the much shorter 10-year loans (there are 7-year loans too, but my experience was only with the 10-year). This is a bit of a shame since they make it so easy to pay-off your house quickly. It did take us a little bit of leg work but we eventually found a local credit union to help us. Here’s what we learned in the process:
First, the pros and cons of a 10-year mortgage?
- Pay-off the house in 10 years
- Because the loan is shorter, statistically, it has a lower risk of default, so they usually charge less interest
- If your goal is to pay down your mortgage faster, you’ll be able to do this without having to calculate each month how much extra principal to pay and then make sure it gets applied correctly. Because that can get hairy.
These loans aren’t for everyone. Here’s some CONs:
- Monthly payments tend to be higher than other loans because of the shorter time period to repay (oddly enough, in our case, because the interest rate was almost cut in half, our monthly payment increased by only about $150 extra each month)
- 10-year loans are usually found at credit unions, so you may have to join a credit union you otherwise weren’t planning to join
How to find a credit union that offers 10-year mortgages
The first thing we had to do was figure out which credit unions in our area offered 10-year mortgages. We used the NCUA’s (National Credit Union Administration) mapping tool to help us find credit unions in our area. The NCUA is the group that oversees credit unions nationwide, so we felt comfortable using their website.
Then, if the credit union offered 10-year mortgages, we took a look to make sure we met their membership requirements – some credit unions are industry or employer specific, others are open to anyone that lives in a certain area.
Next, we needed to compare the loan options from each credit union
We were now ready to gather info. With a spreadsheet handy (or you can use pen and paper), I went to the website of each credit union from the results of the search using the mapping tool. On each website, there was usually a link for loan rates, mortgages, or something similar. After clicking on that link, if they listed a 10-year mortgage option, I wrote down, in a list, the name of the credit union, their APR % and their APY %.
My list looked something like this:
Argh! What is the difference between APR% vs APY%?
Why include the APR % and APY % for each? And what are they??? The main difference is the APR % includes any fees (closing costs, bank fees, etc) and the APY % reflects the interest while it’s compounding (so it sometimes looks lower, because fees are typically paid up front, not financed). For more in-depth reading, take a look at what Investopedia has to say about them.
This is why my list (above) is sorted by APR % – for us, while it was important to know what our interest rate was going to be, we also wanted to see which of the credit unions has the lowest total fees.
Would a 10-year mortgage save us any money?
In our case, we were refinancing our house and still had about 15-years left on the original mortgage (we prepaid some principal, so had between 15 and 20 years left to go). To figure out if we were going to save money with the refi, we needed to figure out what we would pay in interest over the next 15 years on our existing loan and the interest we would pay on the new 10-year loan. Then subtract the two to see the difference. I created an amortization schedule for each loan, but you could always ask your lenders for the information or use a tool like this one at MortgageCalculator.net.
This was the formula we used:
Interest we would pay on existing loan (–) Interest we would pay on new loan = Savings (or no savings)
In our case, we would save over $30,000 in the interest we would need to pay if we refi’ed!!! Needless to say, we were in favor of this! And now hope to be mortgage-free in a pretty short amount of time 🙂