Here's How to Save Thousands on Your Mortgage

By Dan Rafter on 10 September 2015 0 comments

Hate the thought of paying hundreds of thousands of dollars in interest on a mortgage loan? A 10-year fixed-rate mortgage loan or other type of shorter-term financing might help reduce your interest payments.

Most consumers apply for a mortgage loan with a term of 30 or 15 years — but you'll pay a lot of interest over that time. For a 30-year fixed-rate mortgage (even at a low rate), you could pay more than $100,000 in interest if you take the full three decades to pay off your loan. That's why a 10-year mortgage can help you cut your interest costs dramatically. But first consider the pros and cons:

"Taking on a new mortgage to buy a home can involve different factors than when refinancing an existing loan to a lower interest rate," said Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. "When purchasing, the consumer must take into account a few more variables: what they can afford, but also how secure they are in their jobs and what the chances are of moving in a few years."

Pros

Gallegos says that there are several positives to taking on a shorter-term mortgage, such as lower interest rates. He said that 10-year mortgages often come with rates that are as much as 1% lower than what borrowers would find on a 15-year or 30-year fixed-rate mortgage.

Then there's the lower total interest borrowers will pay if they hold their loans to full term. Gallegos gives this example: On a 30-year fixed-rate $200,000 mortgage with an interest rate of 4%, buyers will pay a total of $144,000 in interest if they take the full three decades to pay off their loan.

If they instead take out a 10-year fixed-rate mortgage loan with an interest rate of 3.07% — not an unusually low rate for a shorter-term loan for a borrower with a solid credit score — they'll pay a total of just $32,500 in interest if they take the full decade to repay their loan. That's a difference of over $111,000!

And here's another key benefit: If you take out a shorter-term loan, you'll build equity in that home faster. You can then tap that equity for emergency cash if you need it in the form of home equity lines of credit or home equity loans.

Cons

There are downsides to taking on a shorter-term loan. Your monthly payment will be considerably higher. On that $200,000 10-year loan with an interest rate of 3.07%, you'll pay $1,937 every month just for principal and interest. That monthly figure doesn't include anything you pay to cover property taxes and homeowners insurance.

With a 30-year mortgage loan of $200,000 and an interest rate of 4%, you'll pay just $955 each month in principal and interest.

Gallegos also says that shorter-term loans come with higher risk. What if you or your spouse lose a job? What if you have to take a pay cut or you suffer a medical crisis? You might be able to afford that larger mortgage payment now, but is there enough room in your budget to afford it should your finances suddenly take a hit?

This is why Gallegos recommends that homeowners always have breathing room in their budgets. Financial experts say that your housing expenses should total no more than 35% of your gross monthly income. But to be on the safe side, you might want to make sure that your housing expenses eat up no more than 28% of your gross monthly income.

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Guest's picture
Ikomrad

Just take out a 30 year loan and pay it off like a 15 year loan. You get the same savings but if your income goes down you can pay less on your mortgage and still be current .