0

This question already has an answer here:

Let's say you're going to apply for a mortgage and two of your options are getting a 10 year, fixed rate mortgage or a 30 year, fixed rate mortgage. As is standard, you'll have a lower interest rate and lower payments (say 4.50% and $1500/month) for the 30 year than you will for the 10 year (say 5.00% and $2000/month). In both cases, you do not receive a penalty for early payments.

My question is, is there a reason you might choose the 10 year over the 30 year? It seems to me that you can choose the 30 year and pay it off as early as you can, while taking advantage of the lower interest rate and the lower monthly bill in the event you can't overpay that month. All things being equal, it seems to me the 30-year is always a better choice to me.

marked as duplicate by Joe, Community Jul 7 '16 at 18:52

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

  • It is not standard for 10-year rates to be higher than 30-year rates. It is standard for the monthly payment to be higher. You may be including costs other than the interest rate in this calculation. For example, PMI, property taxes, closing costs, etc. Also, consider adding a country tag to your question. Your interest rate examples seem high for the US. A quick search suggests 3.6% APR for the 30 and 3.1% for a 10. – Brythan Jul 7 '16 at 18:03
  • 2
    I've never heard of a 30 year having a lower interest rate - I've never even heard of a 30 year having the same interest rate. – neminem Jul 7 '16 at 18:03
  • @neminem It seems I've gotten things backwards. Sorry for the confusion. Mortgages are an unknown beast for me and this was something I was simply curious about. – zephyr Jul 7 '16 at 18:05
  • Haven't we just had a question like this a few weeks ago... taking a quick look. – Joe Jul 7 '16 at 18:48
  • Also see money.stackexchange.com/questions/66318/… – Joe Jul 7 '16 at 18:49
5

I think your assumption is wrong, but your conclusion is correct.

Typically, shorter terms have lower interest rates (you assumed the inverse, which can happen but is uncommon), mostly because the shorter the term, the lower the risk is.

Another reason to pick the shorter term would be purely psychological - although you could simply overpay the longer term mortgage, most people struggle to stick with that. It is quite easy to find a reason every month to skip 'just one more month' and use the money for something else - and then end up with 29.5 years after all.

  • Great answer. The only thing I would add is why the interest rates are lower: underwriters are assuming less risk. But I bet you knew that. – Pete B. Jul 7 '16 at 18:20

Not the answer you're looking for? Browse other questions tagged or ask your own question.