10-Year vs. 30-Year Mortgage
Home mortgages offer a choice of a number of different term lengths. The 30-year mortgage has traditionally been the most common term, although more options have become available to fit the varying needs of home buyers. Mortgages are even available with a term as short as 10 years, which can offer a number of advantages and disadvantages to home buyers in comparison to a 30-year mortgage.
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10-Year Advantages
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An obvious advantage of a 10-year mortgage is that you'll own your home outright sooner. If you purchase the home at age 25, you'll have it paid off by 35 and you can use the mortgage payment money for investing or other purposes. If you purchase a home later in life, such as at age 55, you can still have the mortgage paid off by the time you retire. You'll also save money on interest, as 10-year fixed-rate mortgages typically offer the lowest interest rates in the mortgage industry.
10-Year Disadvantages
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A disadvantage of a 10-year mortgage is that the monthly payments are much higher that with a 30-year mortgage. While the payments may be affordable at first, a financial emergency such as a sudden job loss could make it difficult to keep up. A 10-year mortgage is usually more difficult to qualify for because of the higher monthly payment. Lenders normally like to see that your monthly housing expenses, which includes the mortgage principal and interest along with taxes and mortgage insurance, will not exceed 28 percent of your gross monthly income. The higher monthly payments make it more difficult to meet that standard.
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30-Year Advantages
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A 30-year mortgage offers greater payment flexibility than a 10-year mortgage. You can choose to make your regular monthly payment for 30 years or pay extra each month to retire the debt sooner, assuming your mortgage agreement doesn't call for the assessment of prepayment penalties. While a 10-year mortgage may permit prepayment, it may be much more difficult to do so because of the higher monthly payments. Having a lower payment each month allows for more financial breathing room in case times get tough.
30-Year Disadvantages
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A downside of a 30-year mortgage when compared to the 10-year variety is that it takes longer to build equity. In the early stages of the mortgage, most of your mortgage payment is applied to the interest and not the principal. Not having equity means you can't use your home as an additional source of funds in the form of a home equity loan or line of credit. If you purchase your home when you are 40 or older, you could be making mortgage payments well into your retirement years.
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