In Praise of 15-Year Mortgages
Recently, 30-year mortgage have wandered back and forth over the 5% mark. Even when they do climb over that benchmark, that's still extremely low by historical standards. Of course, many prospective home buyers and refinancers worry about the end of unprecedented low rates, but as long as 30-year mortgage rates are within shouting distance of 5%, there is still one way you can still get a sub-5% mortgage rate: by taking out a 15-year mortgage.
Buyers often gravitate toward longer mortgages because they are focused on getting the lowest monthly payment, which also allows them to get a larger mortgage. Those longer mortgages mean lower monthly payments but ultimately higher total interest costs. That being the case, a shorter mortgage means higher monthly payments but long-term savings. In light of all the economic difficulties of recent years, saving money and building equity more quickly are worthwhile goals.
Shorter Terms and Lower Mortgage Rates Can Mean Big Savings
Rates for 15-year mortgages regularly run some 50 to 60 basis points (that is, 0.5% to 0.6%) below 30-year mortgage rates. In addition, their shorter term means that you spend fewer years paying interest. The combination is powerful, as the following example shows:
- When 30-year mortgage rates hit 5% recently, 15-year mortgage rates were at about 4.5%. A half-percentage-point difference in the rate is typical of the relationship between 30- and 15-year mortgage rates.
- On a $200,000 loan at 5%, you'd pay a total of $186,511 in interest over the course of a 30-year mortgage.
- On a $200,000 loan at 4.5%, you'd pay a total of $75,397 in interest over the course of a 15-year mortgage.
- In short, cutting the mortgage term in half can cut your interest expense by more than half. In dollar terms, this example yields a savings of over $110,000. That would represent a meaningful addition to anyone's retirement nest egg.
What's the Catch?
Of course, there is a catch. By compressing your principal payments into a shorter time frame, a shorter-term mortgage will result in higher monthly payments. Using the same figures from the above example, the 30-year mortgage would result in a monthly payment of $1,073, while the 15-year mortgage would result in a payment nearly 50% higher, at $1,530.
Still, that's not a bad deal: cut your interest expense by more than half in exchange for a 50% higher monthly payment. However, if you can't cover such a large increase in your monthly payment, you might consider a 20- or even 25-year term for your loan. While there may not be much difference in the interest rate when compared against a 30-year term, you'll still save money. It's also worth noting that, if your loan has no prepayment penalty, that you can make the term of your fixed-rate loan virtually any length by adjusting the size of your monthly payment. Use one of HSH.com's mortgage calculators to run through different scenarios of how you can save money in the long run if you can afford higher payments in the near term.
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
More help from HSH.com
10 metros where a home costs about $1,000/monthHSH.com identifies 10 metro areas where you can afford the principal, interest, taxes and insurance payments on a median-priced home for only around $1,000 per month.
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.
Mortgage Rates Radar 09/13/2016: Despite Fed concern, mortgage rates holding steadyHSH.com releases its latest Weekly Mortgage Rates Radar showing a slight increase in popular mortgage rates during the seven-day period ending September 13, as concerns that the Federal Reserve may make a move at next week's meeting have to buffeted the financial markets of late. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
Mortgage Rates Radar 09/06/2016: Modest jobs report leaves rates flatHSH.com releases its latest Weekly Mortgage Rates Radar showing almost no change again in popular mortgage rates during the seven-day period ending September 6, as a fair employment report for August failed to provide conclusive evidence that a move by the Federal Reserve is forthcoming. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
Mortgage Rates Radar 08/30/2016: Mortgage rates firm up a littleHSH.com releases its latest Weekly Mortgage Rates Radar showing a slight firming in popular mortgage rates during the seven-day period ending August 30, as Federal Reserve Chair Janet Yellen has indicated that a rate hike could happen sooner than later. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).