Many homeowners are looking to refinance their house and save money on their monthly payments. Although this is a great option when you are in financial trouble, refinancing with the wrong term could create more financial issues. Many borrowers do not know they can choose a different term for their mortgage loan. Paying for a longer term means you are paying a higher interest rate. It also means you are paying more of your monthly payment towards your interest instead of your mortgage. Find out the advantages to refinancing your mortgage with a 10 year mortgage loan.
What are the Different Terms?
A 30 year fixed mortgage rate is the most common program but many borrowers do not know about other available terms. There are mortgage programs available with 10, 15, 20, 25, 30 and 40 year terms. If you choose a longer term you will receive lower monthly payments for your home. However, with a longer term comes a higher rate. This means you are paying more money towards interest and less money toward your mortgage every month.
Fixed and Adjustable Rate Mortgages
Do not get confused when discussing fixed and adjustable rate mortgages. Both offer the same terms however the difference is that a fixed mortgage rate will not change. A fixed mortgage rate stays at whatever rate it is locked in at and an adjustable rate mortgage (ARM) is unpredictable.
Things You May Not Know About Refinancing
Once you choose a term you are not locked in to that term. Whether you choose a fixed or adjustable rate mortgage, refinancing allows you to receive a lower term. If your mortgage has a 30 year term which you have been paying for 10 years, you could choose a 20 year mortgage program when you refinance. You could also choose a 10 year mortgage program and save money on interest. Chances are when you bought your home 10 years ago you were barely able to qualify for your loan. After 10 years of payments and working for better employment, you could qualify for a lower term. Although this can increase your monthly payments, you are paying more money toward your home and less towards your interest.
Disadvantages to a 10 Year Mortgage
The downside to a 10 year mortgage would obviously be the larger monthly payments. If you can afford the higher monthly payment associated with a shorter term, then the disadvantages are almost nonexistent. However when it comes recessions and tough times, having a monthly payment that is too high could lead to foreclosure. That is why it is always best to speak with a mortgage banker about which program and term is right for your situation.
There are many benefits to a 10 year mortgage, but mainly the savings on interest is what most borrowers who choose the term are looking for. Lower rates for paying your loan off sooner is also a great benefit as well. With few disadvantages, the main question that needs to be asked is how financially stable you are. If you can afford to pay the higher monthly payments and you are secure in choosing this option then it offers clear benefits. If you are unsure what may be the best route for you financially a longer term will offer lower payments, but there is always the option of a refinance to a shorter term later.
