By Ralph DiBugnara
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19 Sep, 2024
By Ralph Dibugnara September 12, 2024 By Sandy John, Andrew Pentis, Katie Lowery, CNN Underscored Money If you have a 30-year home loan, refinancing to a 10-year mortgage allows you to pay off your loan decades earlier and score a lower interest rate. But these savings come at the expense of a considerably higher monthly payment, making it easy to outrun your budget. Here’s a look at today’s 10-year refinance rates: Current 10-year refinance rates You may not see 10-year refinance rates advertised widely, but many mortgage lenders offer conventional, decade-long terms, said Ralph DiBugnara, a veteran mortgage industry executive based in New York. “Ninety-five percent of the time, it’s the same rate as the 15-year fixed-rate mortgage,” which are “usually the most advantageous rates in the market,” DiBugnara said. Like other mortgage rates, 10-year refinance rates fluctuate based on factors such as the state of the economy and the overall credit market. The Federal Reserve has maintained the federal funds rate after an unprecedented rate-hike cycle with 11 increases between March 2022 and November 2023 to fight post-pandemic inflation. How 10-year refinance rates are trending After reaching their highest point in more than 20 years in late 2023, mortgage refinance rates have generally been trending downward. “If the economy starts to cool and the Fed signals a shift toward lowering rates, we might see a bit of a dip in refinance rates,” said Mike Roberts, a Utah-based mortgage broker. “That would be great news for homeowners looking to lock in a lower rate.” In mid-2024, Fannie Mae’s Economic and Strategic Research Group forecasted that 30- year mortgage rates will average 6.4% in 2025. Following that estimate, we may see (10- and) 15-year rates around 5.75% next year. (That’s because the 15-year rate has been 66 basis points lower on average than the 30-year rate over the past five years, according to our analysis.). 6 tips for scoring competitive 10-year refinance rates 1. Check your budget. The payments on a 10-year term will be much higher than you’re currently paying if you have a 30-year loan, and you’ll need to have documentation to verify that your income will cover the payments. Calculating your monthly dues — and double-checking affordability via your budget — is a wise first step. 2. Check your credit scores. You’ll likely need a 620 score to get a conventional loan, but a higher score can result in a lower interest rate. Pay all of your bills on time, make sure all your accounts are up to date and try to pay down debts before applying for a refinance. 3. Figure your loan-to-value ratio. For a refinance, you may need to have at least 20% equity in your home to get the best mortgage rates. So, if your home is worth $400,000, you’d need to have $80,000 in equity (.20 x $400,000 = $80,000). 4. Shop around. Compare interest rates, closing costs and other expenses, which the lender will list on a loan estimate document. By comparing the annual percentage rate, or APR, via preapprovals, you can compare all the refinance costs, not just the interest rate. 5. Consider discount points. Some lenders allow you to purchase mortgage discount points in exchange for a lower interest rate. One point typically costs 1% of the loan amount and may lower the interest rate by, say, 0.25 percentage points — but the actual discount amount varies by lender. 6. Choose a loan. Select the lender you want to work with and lock in your interest rate. Here are examples of reputable mortgage refinance lenders that offer some of the best 10-year refinance rates: How do refinance rates work? While the overall economy and the rates set by the Federal Reserve influence mortgage refinance rates, lenders also set rates based on the strength of your application. “It’s a combination of factors — the overall economic climate, the Fed’s policies, your credit score, your loan-to-value ratio and the demand for loans in the market,” said Roberts. “Typically, refinance rates are a bit lower than purchase rates, but the gap has been narrowing lately.” For example, if you have high credit scores, you’ll be offered a lower rate than someone with fair credit scores. You can also lower your interest rate by having more home equity before refinancing. The state where the property is located can also affect the rate you pay, as can the loan program you choose. Related >> How mortgage rates are determined Like new home loans, shopping around for the right refinance lender and choosing a shorter term loan can also result in a lower mortgage rate. Factors affecting individual 10-year refinance rates Credit scores and history Loan program Rate type (fixed or adjustable) Borrowing amount Equity amount Loan term length Location Getting a lower mortgage rate will help to lower your monthly payment. Even a slightly lower mortgage rate can result in substantial savings over the 10- to 30-year loan period. Example: Say you refinance $300,000 on your mortgage. Here’s how changing the term of your home loan could affect your monthly payment and total costs. (The mortgage payments here cover principal and interest only.) Term Fixed interest rate Monthly payment Total repayment 10 years 6.500% $3,406 $408,794 15 years 6.500% $2,877 $470,438 20 years 6.875% $2,303 $552,946 30 years 7.125% $2,021 $727,755 Pros and cons of a 10-year fixed-rate refinance Pros Cons Lower rates and higher overall savings (if you’re refinancing from a longer term) Accrue equity at a faster clip Increase your odds of a mortgage-free retirement Less commonly available among lenders Stricter eligibility requirements Closing costs (2% to 6% of the loan amount) Higher monthly cost (than longer loan terms) Can get in a financial bind if income drops Less payment flexibility Should you refinance your home loan to a 10-year term? Refinancing to a 10-year term can save you many thousands of dollars compared to a longer term loan. In exchange, you must commit a lot of money every month to paying off your mortgage. “If you can swing the higher monthly payment and you really want to be mortgage-free faster, it’s definitely worth considering,” said Roberts. “The interest savings can really add up over time.” Some homeowners prioritize a mortgage-free future, but before committing to a 10-year term, be sure your budget can handle the higher payment without being stretched too far. “The danger I see is, people take a 10-year fixed and then struggle with the higher payment — it’s about 70% [more expensive on average] than a 30-year fixed,” said Steve Hill, a California-based mortgage broker. “If you think your mortgage payment is expensive now, try almost doubling it. It’s not for everyone.” When it might be wise to refinance to a 10-year term When it might be unwise You have a high, steady income You’re preparing for retirement and will have a fixed income within 10 years You want to be mortgage-free faster to focus on other financial priorities Your income could change or is unpredictable You need more room in your budget for other obligations, such as high-interest debt or investing goals You have an ultra-low mortgage rate You want flexibility to pay off your mortgage on time or ahead of schedule, as possible Your current mortgage has a prepayment penalty How to apply for a 10-year mortgage refinance Applying for a 10-year mortgage refinance is a lot like applying for a mortgage with other terms, but some specific considerations are involved. Here are six steps to help you through the mortgage refinance process. 1. Do the math. Use a mortgage calculator to estimate your monthly payments with a 10-year mortgage refinance. If you’re not confident that you can afford 120 straight months of that payment, consider keeping a longer loan term and instead paying extra toward the principal each month. “That way, if an emergency strikes, you're not stuck [with] the higher payment,” said Hill. 2. Check your eligibility. Make sure your credit scores are the best they can be. You’ll also want to check your home equity. The more equity you have, the less risky you are to the lender, which could mean a better interest rate. Although it can be possible to refinance a mortgage with bad credit, you’ll pay higher rates, potentially negating any savings you’d see from refinancing. 3. Research lenders. Ten-year refinance loans aren’t as common as 15- and 30-year terms, so narrowing your list of prospects should be easy. Get preapproved with at least one bank, credit union and online lender each to compare rates — and choose the right mortgage lender. 4. Gather your documentation and apply. Each lender has unique requirements, but they’ll also require documentation to show proof of income, assets and debts. You’ll likely be asked to hand over recent pay stubs and bank statements, for example. 5. Get a home appraisal. Before the mortgage underwriting process can begin, your lender will need a new appraisal of your home to determine its current value. 6. Close on the loan. Your refinance loan will have a closing process and closing costs just like your original mortgage. Like with your original home loan, you’ll have a right of rescission, or a special grace period — until midnight of the third business day after the transaction — to cancel the loan contract. If you have doubts about your ability to afford the high payments of a 10-year term, this is your last chance to back out.