The 30-year fixed rate mortgage has long been the standard loan term for homebuyers, and for many good reasons. A 30-year loan helps to keep monthly mortgage payments lower, keeping home ownership (and larger homes) within reach of the average homebuyer. And for years, the slight interest rate improvement offered by the 15-year mortgage was not enough enticement for borrowers to take on the higher monthly payments.
But with interest rates at record lows, the 15-year mortgage is becoming an incredibly attractive option, both for new buyers and refinancers. Here are some reasons why you might want to break with tradition and consider taking on a 15-year mortgage:
Fixed rates for 15-year mortgages averaged 2.81% in December 2012
Not only is this a rock-bottom rate no matter how you slice it, it’s also significantly better than the average rate of 3.44% for 30-year mortgages (which itself is nothing to sneeze at). According to AnnaMaria Andriotis of Yahoo Finance, “that 0.63-percentage point spread is wide compared with historical figures.” Prior to the housing crisis, most borrowers could expect no more than a 0.3% improvement by taking a 15-year mortgage.
Owning your home in half the time seriously lowers your interest payments
If you were to borrow $150,000 at 3.44% for 30 years, you would end up paying nearly $241,000 total, with over $90,000 in interest. On the other hand, if you were to take a 15-year loan at 2.81%, you’d only pay $184,000 total with $34,000 going to interest.
Granted, your monthly payment would go up from $670 to $1020, but finding an additional $350 per month would be worth it in order to save $55,000 in interest.
Refinancing to a 15-year mortgage can help your bottom line now and in the futureThe big drawback to a 15-year mortgage is that higher monthly payment, but depending on their circumstances, homeowners who refinance a 30-year into a 15-year mortgage can have the best of both worlds. Those borrowers who have been paying down their 30-year loan for a few years may find that today’s low rates mean that they can keep a similar monthly payment with all the benefits of a shorter loan term and a lower rate.
For example, a borrower who took on a $150,000 30-year mortgage in January of 2004 with a rate of 5.75% would have a monthly payment of around $875. If she were to refinance her current balance of approximately $125,000 with a 2.81% rate for 15 years, her payment would actually be reduced to $850. So not only would this free up some money in each month’s budget (thereby really helping to offset the refinancing closing costs), it would also mean she’d own her home six years earlier and pay a great deal less in interest overall.
The Bottom Line
While 15-year mortgages are gaining popularity, 30-year mortgages still make up more than 80% of the loans for new home purchases. It’s clear that the advantages of the 15-year term do not necessarily outweigh the costs for all homebuyers and refinancers. However, if you have good credit and the ability to take on a higher monthly payment, a 15-year mortgage just makes sense.
How many of you have or are thinking about going to a 15 year mortgage?