The best mortgage term: 10 years

Want the best mortgage term? Think beyond the 30-year fixed

The best mortgage term: the 10-year fixed rate loan!

The best mortgage term: the 10-year fixed rate loan!

What were you doing 30 years ago?

Me, I was about to start my sophomore year in high school. I was thinking a lot about getting my driver’s license and staring at a lot of boobies. I had begun what would become a lifelong obsession with destroying my hearing, blasting Duran Duran, Men At Work and Loverboy through my orange-padded Walkman headset. All-in-all great times!

In other words, it was a lifetime ago. A lifetime.

Now think back to what you were doing 10 years ago. For me, I was working. My boss who thought highly of me got fired in a tussle with a hated adversary. That adversary became my new boss and he transferred all his hate to me. I was thus left fighting to save my job, even though from any objective measurement, I was doing great in my role. (No wonder I hate corporate America so much!) It was also the year I bought two fourplexes and I spent nearly every weekend for a year working on them.

The thing is, though, that doesn’t seem that long ago. Yeah, a lot has changed since then, but I still remember those days clearly.

Not long ago, when I wrote about how to get rid of your mortgage, I mentioned offhand that part of the strategy was a 10-year mortgage. I also mentioned in How much should you spend on your house that the payment on a 10-year loan should be the measure for how much house you should buy.

I realized I never completely explained my thinking around 10-year mortgages so I wanted to spend some time fleshing out my thoughts on that.

The 30-year term was created after the Great Depression in the 1930s to stabilize the real estate market. Now homes were accessible to a much larger market than ever before. As easy credit has a way of doing (we’re now seeing it with tuition costs), the rapid increase in the number of buyers created an increase in housing prices.

Thus, as time went on, the 30-year mortgage became less of an option and more of a necessity — particularly during periods of high interest rates. Now the 30-year mortgage is the standard loan in America. Nearly everyone with a house has one. Rather than simply believing it is the best mortgage term, many people assume there is no other option.

For people seeking pretirement, however, there is another option and it’s the best mortgage term: the 10-year loan.

Here’s why I say it’s the way to go right now while interest rates are still low:

It’ll help keep you honest about what you can afford

When I give the advice to not buy a house if you can’t afford the 10-year payment, I’m not necessarily recommending that you take out a 10-year loan — it’s just a way of determining the right loan amount for your budget. However in most cases I DO recommend it, because it prevents that money from cleverly turning into electronics and furniture. These many, many things that you’re going to want but don’t really need will be out of reach — and that’s a good thing. You may really want that nice, new couch for your living room, but you’re effectively buying that couch on credit if you’re only able to “afford” it because your house payment is artificially low.

The payment might not be as high as you think

Check out the difference in the payment amounts for two sample loans, one at $250,000 and the other at $450,000:

Loan AmountRate for 30 year fixedPayment on 30 year fixedRate for 10 year fixedPayment on 10 year fixedDifference in monthly payment

Now, I’m not pretending that the extra money you’ll be paying each month is not an insignificant amount of money. On the smaller loan example, you’d be out an additional $1,100 per month. That will sting. It’ll sting badly. On the higher-priced loan, you’ll be well over $2,000 more each month.

Here’s why I say that’s OK. While it certainly is a chunk of change, let’s remember that in most cases, we’re spreading this across two people. So on the smaller loan, we’re talking about $500 each. That should be doable. If it’s not doable, we have to say you’re buying too much house and send you back to my first point.

You’ll actually see results

Sure you’ll gain equity with a 30-year loan as well. Eventually. Nearly every first time home buyer is stunned that just a few pennies from their giant mortgage payment actually go toward principal. For YEARS you’ll watch your principal sit there, barely changing at all. If you sell in too short a time period and you haven’t seen any market appreciation, the theoretical equity that you’ve been earning by reliably making your mortgage payment each month will have been more than wiped out by realtor commissions, property taxes and home maintenance.

When you go with the best mortgage term — the 10 year fixed loan — it’s the opposite. We have a 10-year loan on my current house (AND I live mortgage-free — guess I should explain that one of these days). It’s incredible watching the principal balance drop in big heavy steps. In fact, I’m finding it rather hard to put into words how breathtaking I find it to be each month. Even in the first month our principal began dropping by $1,700 per month. Every year it’s another $20,000 gone. Compare that to a 30-year loan where on a loan of our size you’d see a drop of just a few hundred a month. Take a look for yourself with an online amortization table.

Low interest rates make it possible

My favorite reason to pursue a 10-year loan is that you can. The low interest rates we see currently make a massive difference on your total payment size, all else being equal. That means you can put your house purchase on the accelerated plan, something that was largely impossible for middle class buyers until recently.

You can lower your debt load

Back when I was carrying five mortgages at once, it really sucked doing loan applications. Sure, credit was unbelievably easy to get. I once had a loan officer looking at my list of five mortgages and ask me “So do you want to run this through as a no-doc loan?” Meaning they wouldn’t need to verify my income, they’d just approve the mortgage based on my credit score. WTF?

That was still easier than in the days following the great economic collapse. When the list of loans popped up  on my credit report, it would take about 45 minutes to walk them through each one, explain the rental situation for each and explain how I managed to make all my payments on time. While it’s still pretty tough for me to get a home loan, it’s getting easier. As I’ve been shedding properties (and related debt) in recent years, the ice has been melting. My overall debt looks much more reasonable and I don’t get the shocked questions about the eye popping numbers on my credit report.

It gives you options

Even if you have a few years left on your 10-year loan, your disciplined focus on getting rid of debt and building up equity creates new opportunities for you. You’ll be able to consider buying investment property or just pay off your house completely. You can take out an affordable home equity loan and start a business or pay for your kids’ education. You name it. But even more fun, if you start out on a 10-year loan path and save up a little on the side, you could pay off your mortgage in as little as seven years! Now that’s an option.

It’s less risky

The biggest push-back against a 10-year loan is usually fear of a cashflow crunch should hard times arrive. The classic scenario is one or both members of the couple lose their job. The house payment is too large to be made on one salary and the house of cards collapses and you lose the house and the kids are out on the street.

Is it really a concern? Of course it is. But you’re not going to run into this situation because you’re reading and are going to take some measures to keep yourself safe. If we look a little deeper we can see that it’s actually less risky to go with the 10-year over the 30 year loan. You wouldn’t be buying a house if your employment wasn’t reasonably stable anyway. But how far into the future can you see? You might feel reasonably safe for the next 7-8 years but what about the next 20-25 years? It’s a lot harder to predict a couple decades out, right?

Also, because you’ll be building up your net worth instead of buying a bunch of crap, you’ll have a larger margin of safety. If things go south on you, you’ll have equity available and controlled housing costs so you’ll have more security than your highly leveraged neighbors.

Which brings me to final reason you’re safer with a shorter-term loan: Your emergency fund. Now, in the first couple years things could be tight and you need to be careful. Bad things can happen. I’d say keeping 6-12 months of emergency cash handy is pretty important in the early years. In later years, however, you can open a line of credit to access your newly-built equity, which will serve as your emergency fund.

Your housing costs will be controlled

One of the important steps toward reaching pretirement is bringing your housing costs under control. Whether it’s as a renter or homeowner, you need to ensure housing costs don’t rise suddenly on you in later years, eating up your cashflow and sending you back to work. Getting rid of your biggest expense gives you a lot of power over your monthly finances.

You could be mortgage-free

Hey, need I say more? The American Dream used to be “owning” a house (even though the bank really owned it). These days, the American Dream is about getting rid of your mortgage as early as possible in life. That mortgage payment is what keeps us chained to our desks. You dream of doing something else, anything else, but the career brought you to this place and you’d have to make much less if you changed careers. Getting rid of your mortgage is what makes this possible. And the 10-year loan is the best path to getting there.

What do you think? Have I convinced you the 10-year fixed loan is the best mortgage term?

Image courtesy of Renjith Krishnan via
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32 Thoughts on “The best mortgage term: 10 years

  1. Hi Nick,

    I’m convinced this is really solid advice for most people. A 10 year loan will not only will result in a better interest rate, but will more importantly nudge people to buy only as much home as they can “truly” afford and nudge them away from spending as much of their discretionary income. Setting up a system that incentivizes good behavior like that is a smart move.

    We went with a 15 year fixed mortgage but likely would’ve been better off with a shorter term.
    Done by Forty recently posted…Birthday & 7 Years from the Goal: Progress UpdateMy Profile

    • Pretired Nick on August 13, 2013 at 2:25 pm said:

      We almost went with a 15-year mortgage when we picked this current structure. In the end, we didn’t because the payment difference was so minuscule between the 15- and 10-year loan. Sure our cashflow would be better, but not five years of payments better.

  2. I see your points and agree generally, but if I were to only apply for 10 year mortgages…I might never buy a place in NYC. (though maybe that’s the right financial decision, I don’t know). I know housing is pretty expensive where you are also. I’m not sure if I’m convinced that it is less risky…no matter how stable you job is, you just never know. The lower interest on a 10 year mortgage is great, but I don’t know if getting a longer term mortgage and making extra payments might be a safer route.
    Andrew@LivingRichCheaply recently posted…Why Invest in Index Funds?My Profile

    • Pretired Nick on August 13, 2013 at 2:27 pm said:

      Yeah, I’m definitely speaking in general terms, so it’s not going to apply in all situations. In NYC and other overpriced markets, though, I tend to lean toward just investing every penny you can and then moving once your working career is over. But it can depend a lot on your income level as well.

  3. Great points. I currently have a 30-year mortgage, but I’m hoping my next property will have a shorter term (10-15 years).
    Lisa E. @ Lisa Vs. The Loans recently posted…The Best Ways to Pay Down Your Student LoansMy Profile

  4. Nick! Wish we’d done a 10 year, or even knew of it for that matter. But we have plans to shrink our remaining 20 years of our loan significantly;) Have a hearty one!

  5. We looked at a 15-yr mortgage when we originally bought our house 5 years ago. The interest rates weren’t really that different: 4.125% for 30-yrs and 4.025% for 15-yrs. What drove our decision was the cash flow issue. We can always pay more on the mortgage with a 30-year payment, but never less on a 15-yr payment. And I’m really glad we made that choice. The sticker shock of daycare eats up a 30-yr payment all on its own, and we would never have had the money we do now to put towards our other debts. We do plan on paying off the house within 10 years (putting us at about the same place if we had gotten the 15-yr loan), but I like that we have the option to invest our money elsewhere if we want – like the stock market.
    Mom @ Three is Plenty recently posted…Saving Money with Baby – Cloth DiapersMy Profile

    • Pretired Nick on August 13, 2013 at 2:35 pm said:

      Most of what you describe is actually a really good strategy. In effect you’re doing the same thing, but with a little bit more safety margin on your monthly expenses. Most people, though, aren’t as disciplined as you so they would likely just spend all that extra money.
      That said, I’m NOT a fan of paying extra money to the bank toward your mortgage. Because they aren’t re-amortizing your loan, you’re basically getting no growth over the years by doing that. Instead I’d recommend taking the same amount and investing it yourself so that you see growth on your funds over the years. Then, when ready, you can write a check to the bank, refi and magically have a much lower balance.

  6. I think 15 is better for most people. We went with a 15 year FRM on our first home and it was a great decision. Well, if we stuck with the original term, we’d have only 2 years left to pay it off. We refinanced a few time though. Last time was to a 10 year FRM and then rented it out.
    It’s cash flow positive and should be paid off in 8 years or so. Can’t complain too much.
    retirebyforty recently posted…You need to know a little DIY home repair to be a landlordMy Profile

    • Pretired Nick on August 13, 2013 at 2:39 pm said:

      Yeah, when that thing is paid off, you’re going to be sitting pretty! I like the 15-year loans a lot. But when we looked at the payment difference between the 15- and 30-year, the amount was so little we decided to squeeze into that extra notch in the belt and go for it. We were worried before the loan closed but we’ve been super happy with it ever since.
      For rentals, I’ve typically advocated going with 30-year loans to keep the cashflow up. But, looking back, I almost wish I’d taken the cashflow hit and worked the principal down. If I was to buy another rental, I’d have to think about my best move there.

  7. What about the argument you can invest the difference and come out ahead?
    SavvyFinancialLatina recently posted…House Shopping Is Disappointing- The Fruit Tree HouseMy Profile

    • Pretired Nick on August 13, 2013 at 6:58 pm said:

      Hi Savvy! I was purposely staying away from that topic to avoid muddying the waters. But for sure, people who are highly disciplined and relatively young can come out slightly ahead by investing in the market while leaving their home leveraged at a lower rate. But remember, you CAN lose your principal in the market so you could get caught. If you’re young enough where you can handle the risk, it can be a good strategy.
      I’m not really in love with that approach for people in their 40s or above, generally speaking. I’d hate to see a happily pretired person trudging back to work because of a market dip and a mortgage to pay. With that in mind, though, paying your mortgage down until just a relatively controlled amount left could be fine.
      Let’s say you paid off a $300k mortgage down to where you had just $100k left. Then, with a quick refi, you could concentrate on building up your pretirement fund leaving just a very doable $100k mortgage. And you could even set that one at 30 years if you wanted to allow for maximum savings.

  8. Yes, this clearly makes sense and I totally agree with it: a 30 year mortgage IS a lifetime and am not the person who would be willing to do that. A 10 year loan is more realistic, you get rid of it sooner and then you have more time to put that extra money to good use. The only thing is that indeed you have to afford it!
    C. the Romanian recently posted…How Much Does Pregnancy & Birth Cost?My Profile

  9. For our first house, we went with a 15 year mortgage.

    Now that the house is paid off and we’re going to move, I have to make a different kind of decision regarding how much, if any, to finance, and then how to do so.

    Hungry like the wolf…hungry like the wolf…hungry like the wolf…
    No Waste recently posted…We Killed $30,000 In Student Loans (Part II)My Profile

    • Pretired Nick on August 14, 2013 at 8:01 am said:

      Good for you, No Waste! In your situation, it can be totally fine to take a small mortgage just to keep your pretirement fund growing. Particularly since you’ve proven you can be disciplined enough to stay on track!

  10. Awesome article, Nick. I completely agree with you. It’s amazing that just doubling your payment reduces the time you’ll pay a mortgage payment by 67%. If you can’t afford the payment on a 10 year loan then you’re buying too much house. No need to become house poor.
    Jake @ Common Cents Wealth recently posted…How to Save Money on GroceriesMy Profile

  11. I really like your analysis! I think most people would be astounded to realize how little of their mortgage payments go to principal in the first 5-10 years.

    I wonder if more people would consider renting if they knew they were just paying “rent” to the mortgage company in the form of interest instead of to a landlord?

    I struggled with the term length when we refinanced most recently; I finally settled on the 30-year because the rates were so low and this afforded us flexibility if anything were ever to happen to my job. We are self-amortizing it like a 15-year loan, but we just paid the small interest rate premium for those 30 years of flexibility, which I was comfortable with.
    Brad @ recently posted…How a Family of Four with a $100,000 Yearly Income Pays only $6,400 in Federal Income TaxMy Profile

    • Pretired Nick on August 15, 2013 at 1:12 pm said:

      Thanks, Brad! Thinking of it as renting from the bank is extremely apt. That’s essentially what’s going on. I like the 15-year loan a lot and amortizing it yourself is a great way to go — as long as you’re disciplined over all those years (most people aren’t).

  12. I really do agree with you Nick that 10 and 15 year mortgages are great. We will be looking to refinance later down the road. Its just when you looking at doubling up on a monthly payment for the wifey and I it just didn’t make sense. I am very strict on budget and the extra money we would have spent on mortgage is now actually working for us. This is not the case for everyone so I would agree at the minimum do a 15 year to get a lower interest rate as well have cutting those interest payments down and saving a chunk of money in the process.

    On a light note how’s being a stay-at-home-dad going? They grow up so fast enjoy this time you have.

    • Pretired Nick on August 17, 2013 at 6:56 am said:

      Yeah people who can be disciplined can work the system even more, but the vast majority need discipline forced upon them.

      Being a stay at home dad is going great. He’ll be on year old tomorrow! It’s getting harder to get anything else done but it’s still lots of fun!

  13. I took out a 5/1 ARM, which has comparable rates to a 15 or 10 year fixed with the payments of a 30 year amortization. Even though I have about $3k of buffer room each month, I was still scared of taking on a higher required mortgage payment. My plan though is to pay the whole thing off before the rate resets, i.e. treating it like a 5 year fixed mortgage. I’m currently about 6 months ahead of schedule on that plan.

    You don’t have to refinance to improve your cash flow if you’ve been making huge chunks of extra payments on your mortgage. You can also recast the mortgage. Some lenders don’t charge money to do so, some charge $100-250. Since I’ve paid down about 8 years of my mortgage amortization, recasting would save me $200/month of cash flow right now, if I needed it. If I lost my job, I would probably recast the mortgage. That would reset the amortization back to 30 years, but then I save on cash flow and I can always start throwing more at the principal again once I find a new job.
    Leigh recently posted…July 2013 net worth update (+9.4%)My Profile

  14. “It’ll help keep you honest about what you can afford”

    Wow, this is really smart and advice that I’ll be passing along to others. They won’t want to hear it, but too bad.

    On the flipside, did you know that there are 40 year mortgages now? This seems like the worst idea ever. Do you want a 7 year car loan to go with that mortgage sir?

    No thanks and no thanks.

    • Pretired Nick on August 20, 2013 at 6:24 am said:

      Thanks, Mr. 1500!
      Yes, I do know about the 40 year loans. The funny thing about those is that payment is barely any lower than the 30 year. I can’t imagine how dumb you’d have to be to take out a 40 year loan.

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  17. EndinSight on October 26, 2013 at 5:23 am said:

    This is some of the best financial advice I have ever seen in print. This is a great way to prevent people from getting into trouble. If you can’t afford a 10 year – don’t buy it! Wish we did it, however we went for the 15 and then opted for the “bi-monthly payment” plan (cost $200 to set up) to knock another 2 years off the loan. Have 2 years left now and can’t wait to start investing that old payment into something besides a bank.

    • Pretired Nick on October 28, 2013 at 10:10 am said:

      Thank you so much, End! I hope it helps some folks! It’s so great you can see the end. Once you start working it down quickly, it goes really, really fast!

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