A loan with the same interest rate and payment over the entire 10 year life of the loan. As one of the shorter loan terms available, 10 year fixed loans offer lower lifetime interest payments than similar loans with longer terms, but also have a higher monthly payment.
A 10 year fixed rate mortgage is a financing option that allows you to build equity relatively quickly. With this type of loan, the interest rate remains the same for the ten year term of the loan and is typically lower than that attached to a 30 year fixed rate mortgage.
A fixed rate mortgage is usually fully amortizing, meaning that your payments combine principal and interest so that the full amount of the loan is paid off after a set amount of years. With a 10 year fixed rate mortgage, the loan is fully amortized, or paid off, after 10 years as long as no changes have been made to the terms of the loan.
The two biggest advantages of a 10 year fixed rate mortgage are a lower interest rate and the ability to build equity more quickly. Since interest is the fee for borrowing the loan, it is nice to pay lowest rate possible. A 10 year fixed rate mortgage will save you a significant amount of interest over the life of a loan compared to a 30 year fixed rate mortgage. Also, since less of your monthly payment is going toward interest, more of the payment is going toward principal. This enables you to build own your home and build equity more quickly since more of your monthly payment goes toward the principal.
On the other hand, a 10 year fixed rate mortgage has higher monthly payments than a home loan with a longer term. The fact that the loan is due to be paid off in just 10 years, rather than 30 years for example, means that you have to pay more each month. This can lead to a very high monthly mortgage payment and may limit the price of the home that you can afford.
For example, say you wanted to take out a home loan of $160,000 and you could get a 6 percent interest rate with a 10 year fixed rate mortgage. At this rate your monthly payments would be $1,776.33. If, however, you took out a 30 year fixed rate mortgage at the same rate, your monthly payment would be $959.28. Over the life of the loan, however, you would pay $223,217.48 interest for the 30 year fixed while only $53,159.24 interest with the 10 year fixed. That is a big difference in amount paid in interest.
You need to know your long-term financial goals when deciding on the terms of a mortgage. Are you going to be in the house for the term of the loan? Is paying as little in interest as possible important to you? If the higher payment is not an obstacle and you like the idea of building equity quickly, a 10 year fixed rate mortgage may be right for you. However, if you most likely will be moving before the term of the loan has expired, there may be other financing options that make more sense.