30 Year Mortgages Aren't Always Best
Getting a 10-year fixed loan instead of a 30-year fixed loan will reduce the interest you have to pay and give you more purchasing power as a homebuyer.
A lot of homebuyers out there are chasing after the 30-year fixed mortgage, but does that make sense in your situation? Today I’ll tell you why I’ve always attained 10-year fixed terms for my loans and how this type of financing can benefit you.
I’ve always done 10-year financing because I’m aware of where I’m at in this stage of my life. When my wife and I bought our first townhome in Hillcrest, we knew we probably wouldn’t be there for 30 years—probably not even for six. Why, then, would we go with a 30-year fixed mortgage, which would raise our interest rate and reduce our purchasing power? For that property, we used a 10/1 ARM loan, and when we sold that house and bought our next one, we had the same type of loan.
The average American stays in their home for about seven to eight years, but in Southern California, the average is less than that. Why is everyone still getting 30-year fixed rate loans?
If we look at rates today in a general sense, you can get a 30-year fixed rate at about 3.75%. You can get a 10-year fixed rate, on the other hand, for about 3.1%. If I’m a homebuyer, I’m much more attracted to the latter option knowing that I probably won’t be in my home for 10 years.
"Are you defaulting to a 30-year fixed loan because that’s just what people do, or does 10-year financing make more sense in your situation?"
Even if you do stay that long, you can always refinance the loan. In fact, I’ve already refinanced my loan twice and I’ve only been in my current home for five years. As rates drop, I keep resetting my 10-year loan, so that loan in reality has extended to 14 years, all the while having a lower rate than a 30-year fixed loan because I’m watching the market and I do no-cost, no-fee refinances.
If you multiply 3.1% by 10 years plus a one-year rate of 5.1%, that 11-year blended rate is still less than what you’d pay at 3.75% for 30 years.
So the next time you buy a house, ask yourself: Are you defaulting to a 30-year fixed loan because that’s just what people do, or does 10-year financing make more sense in your situation? In my opinion, 10 years is an ideal time period for a mortgage because you have more time to plan and refinance.
There’s one last fact I want to highlight regarding refinancing. Over the last 50 years or so, interest rates have had their share of peaks and valleys, but overall they’ve been on a downward slope. We don’t know if that’s going to continue into the future, but it’s something to take note of.
If you’d like to get a quote from a lender to see if getting a 10-year loan makes sense, I know plenty of great ones I can refer you to. If we work together to buy you a home in the near future, this will be beneficial because I’ll know what your real purchasing power is.
If you have any other questions about this or any other real estate topic, feel free to give me a call or send me an email. I’d love to help you.
Discussion
What are the costs for refinancing? When you refinance do you start all over again from the beginning? I have looked into refinancing my 30 year loan, but after adding in the costs and fees, plus my amortization goes back to the beginning again, I found it was not feasible for me. Do you have someone who offers a better solution from a 30 yr. to a 10 year? If so please let me know. thank you
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