10-year mortgages gain popularity
Baby boomers nearing retirement want to pay off their homes while they're still working. You can save a lot on interest – if you can afford the higher payment.
During the real-estate boom, people were refinancing their homes, pulling out cash and lengthening the mortgage term.
In recent years, an opposite trend has emerged: a trend toward shorter loans. That includes 10-year loans, reports syndicated columnist Kenneth R. Harney.
Baby boomers who want to pay off their home mortgages before they retire are attracted to 10-year loans. Low interest rates make the shorter term even more appealing.
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More than a quarter of all refinanced loans – 28% – in the first quarter of 2013 were for shorter terms, with one-third of the borrowers with 30-year loans asking for shorter terms.
Community banks, which tend to keep 10-year loans in their portfolios, are seeing more interest in such loans, Harney reported. Some are offering those loans at rates below 2.5%.
Harney offers this scenario for a $150,000 mortgage at Rockville Bank in Connecticut:
- 10-year loan: Interest rate 2.375%, monthly payment of $1,406.
- 15-year loan: Interest rate of 3.25%, monthly payment of $1,054.
- 30-year loan: Interest rate of 3.99%, monthly payment of $715.
If you’re a baby boomer who is earning a good living now but want to have your loan paid off when you retire, you can see the appeal. On the other hand, the monthly payment is nearly twice as much.
Is a 10-year mortgage a good move? Marcia Passos Duffy at Bankrate.com offers some pros and cons.
Biggest pro: "A 10-year mortgage can save you an eye-popping amount of money over a 30-year loan," she writes.
Looking at the three scenarios above for a $150,000 mortgage, you’d pay only $18,664.59 in interest over 10 years versus $39,720.73 in interest on the 15-year-loan and $107,492.52 on the 30-year mortgage.
Biggest con: Your financial situation could change – perhaps you lose your job before you’re ready to retire and you can’t get another – and you would not be able to afford the higher payment or refinance into a longer loan.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.