Can 15-Year Mortgage Rates Make You Rich?
There’s no question: 15-year mortgage rates are lower than their longer-term cousin, the 30-year mortgage. Plus, 15-year mortgages can save borrowers a lot of money compared to traditional 30-year financing.
Check your new rate (October 7, 2021)
Your payment does not double
Considering these advantages, why aren’t 15-year mortgages more popular?
Maybe many think they can’t afford the higher payment that comes with resetting your balance in half the time.
To understand how 15-year mortgages work, we need to take a look at some numbers. Say you can borrow $ 200,000 over 30 years at 4.0% with a fixed rate loan.
The monthly cost for principal and interest will be $ 954.83. If you hold the loan to its term – if you hold it for 30 years – the interest charge will be $ 143,739.
If you paid the same rate and took a 15-year loan, your payment wouldn’t be twice as much. It would be $ 1,479.38.
15-year mortgage rates
But 15-year mortgage rates are NOT the same as 30-year mortgage rates. Let’s borrow the same amount of money and fund it over 15 years.
Instead of an interest rate of 4.0 percent, borrowers are likely to pay a lot less, perhaps 3.25 percent. The reason for the lower rate is that the shorter term loans are less risky for the lender.
If you look at the weekly prime mortgage rates published by Freddie Mac, you can see that the 15-year loan is generally available at about 0.75% lower than 30-year loans.
If we finance $ 200,000 with a fixed rate mortgage of 3.25% over 15 years, our payment would be $ 1,405.34 and the total interest cost would be $ 52,961. That’s a difference of almost $ 91,000.
It might not be enough to make you rich, but like the old expression goes, it couldn’t hurt.
15-year mortgage payments
As you’ve probably guessed, there must be a catch somewhere – the payout is higher, making it more difficult to qualify.
So while 15 year mortgages are attractive, the stark reality is that many borrowers cannot begin to afford them. Lender debt-to-income ratios (DTIs) exclude the higher costs of 15-year loans, even if borrowers are willing to scrimp on larger payments.
Equally important, 15-year mortgages are a significant problem if household finances collapse due to a layoff, reduced hours of work, or other issues.
With a 15-year mortgage, you MUST pay that $ 1,405 each month. If you have 30-year financing, your obligation is to pay $ 955 per month, a much easier burden.
It may seem that the door to big savings is closed. But – as they say on late night television – wait; There is more.
While some borrowers may not be able to get all the benefits of a 15-year mortgage, there are many benefits that can be achieved with shorter loans. Without facing a severe monthly obligation if income drops.
The prepayment option
Unlike mortgages that dominated the market before the financial crisis, most loans issued today have no prepayment penalties.
In fact, VA loans, FHA mortgages, and compliant loans are all offered without prepayment penalties.
So let’s say $ 450 per month is not an expense you can afford, but $ 150 per month is fine. If you borrow $ 200,000 at 4.0% interest and pay $ 1,105 instead of $ 955 per month, this is what happens:
First, the loan is fully repaid in 278 months instead of 360 months. That’s a difference of 82 months, or 6.8 years.
Second, the total interest cost of the loan goes from $ 143,739 to $ 107,087. You save $ 36,652 if you keep the loan until it is paid off.
While $ 36,600 isn’t as big a savings as $ 91,000, it’s not that bad.
In other words, you qualify for a 30-year mortgage, with the right to prepay in whole or in part without penalty. You can then structure your own mortgage term by making prepayments tailored to your situation.
Another option, if you know you won’t be keeping your home and mortgage for more than a few years, is to refinance into ARMs, such as 5/1. The rates are similar to those for 15-year mortgages.
You might choose to speed up your loan repayment by paying more than you need each month. Or just add the difference between the 5/1 and 30 year payment to your savings each month.
When considering prepaying a 30-year fixed-rate mortgage to lower interest charges, know that you aren’t benefiting from a lower mortgage rate. You don’t get 3.25% instead of 4.0% in our example.
In addition, the potential savings over the life of the loan are unlikely to be realized, as most loans are simply refinanced well in advance of maturity. Today, the typical loan has been in progress for less than five years, according to Freddie Mac.
And, according to the National Association of Realtors, the typical existing home – on average – sells in just 10 years.
Finally, investing every available dollar in prepaying your mortgage could leave you short in an emergency. The only way to get this money back would be to take out a home equity loan or sell the property.
Take (the) advantage
However, if we want to highlight the shortcomings of advance payments, we should also look at some of the bright spots.
By making consistent prepayments, you’ll owe the lender less and therefore have more credit at closing when you pay off the mortgage or sell the house.
And, in order not to be ignored, if you run into financial difficulties, you don’t have to keep making prepayments.
Alternatively, you can put money aside in a savings or investment account and use it to pay off your home loan sooner when you’re ready. You can get a decent return on your funds, while still having them available to you in an emergency.
What are the mortgage rates today?
The value of the 15-year mortgage depends on the spread, or difference, between the available 30-year mortgage rates and the 15-year mortgage rates. It’s not a constant amount, so you’ll want to check with multiple mortgage lenders to find the best deal on a 15-year loan.
Check your new rate (October 7, 2021)