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 future
The 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?
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Great post! I have actually heard a large shift towards 20-year mortgages. Basically they are a middle ground between 30-year and 15-year mortgages. They offer smaller payments than 15-year, but still have interest advantages over 30-year mortgages. Keep up the good work.
20 year is a nice in between. I don’t see many people offering them though.
We are definitely thinking about it. Not sure which way we will go, but we do plan on buying within the next year.
Both are good options. For me personally I would rather have the lower monthly payments. With rates so low I am in no hurry to pay down my mortgage. I can invest my money and are a lot more than 3.5%.
We refi’d a little more than a year ago and jumped from a 30 yr at 5.375 to a 15 at 3.25. Only $100 more per month, but we’re shaving a decade and a half off of the payoff time. Huge savings long term. Wish it were worthwhile to refi again and capture an even lower rate, but the fees make it not worth it.
This is on my agenda for our next home depending on the rates when we actually get to sell.
“When we actually get to sell” Sounds like you are struggling to get rid of someplace just like me 🙂
Yep, neighbor just undercut me by 15k just to get out as they built another. Just screwed my plans big time. They even took a good loss.
On our podcast this week we talk about this topic. While I L.O.V.E. paying debt off early, too many things go wrong in life that we can’t predict. With the 30 at super low rates (though you’re right….the spread is huge right now), why not make 15 year payments on a 30 year loan?
Why? Because in 30 years your money is going to be worth a lot less than it is today. Inflation plus the mortgage tax deduction (if you qualify for it) could easily completely erase the premium on the 30 year mortgages vs 15 year mortgage to borrow money at all time low rates for a 30 year period… I’d lock that in. It of course depends on you keeping the mortgage for 30 years which is a huge feat in today’s world.
I completely agree. My point was that you should take out a 30 year loan and make 15 year payments if you’re someone who’s going to take out a 15 year loan rather than a 30….I agree that it’s not optimal use of money, but better than grabbing the 15. If you want optimal, I’m with Sean. You can make a ton more money with that cash in investments than you can throwing it at a super low cost loan.
I knew you’d respond. Glad I’m not missing anything in my analysis. Free financial wisdom from the Free Financial Advisor 🙂
Great post Emily! If I were to go into debt to purchase a home, a 15-yr. is the only type of mortgage I would pursue. I just can’t bear to pay that much in interest…makes me sick.
I have a 30 years mortgage on a rental property which allows to free up some cash and to have more breathing room if a tenant vacates for a while. I try to overpay once in a while because the interest like you said is much bigger but at 2.29% I am not in a hurry at the moment and prefer to invest elsewhere. If rates go up, I would still keep 30 years and try to pay in 15.
Yeah I wouldn’t do anything but a 30 year on a rental property.
I love my 15 year fixed (2.75%) deals! I feel it enables me to time a “retirement” the right way. Imagine being mortgage free???
We have a 25 yr mortgage on our home at 3.99% which we will have paid in 4 years rather than 25. I’m sure if we had to re-mortgage in 2014 like we should be we’d still get a better interest rate then we have now but you never know though. Anything could change. The faster we paid it off the better, but that was our personal choice, others may differ.