Now's the Time for That 15-Year Mortgage

NEW YORK (MainStreet) — With interest rates at historic lows , this may be the best time ever to buy a 15-year fixed-rate mortgage.

Homebuyers can get a 15-year fixed-rate mortgage at around 4% right now, and possibly save more than $100,000 on the total cost of the home loan, based on the current 30-year mortgage rate.

Here’s why “going 15” is such a smart move, if you act now.

According to the BankingMyWay Weekly Mortgage Rate tracker, the spread between 15- and 30-year fixed-rate mortgages is growing wider, and substantially so this week. Fifteen-year rates are at 4.261%, while interest rates on 30-year loans stand at 4.989%, a spread of 628 basis points (or 0.63%). The difference provides some serious food for thought for new homebuyers.

A few weeks ago that spread was even higher, approaching 0.8%, and took the distinction as the highest spread ever tracked by Freddie Mac (Stock Quote: FRE), which follows these sorts of things.

Mortgage rates are in decline across the board these days, although the 15-year number seems to be falling faster. Economists point to the drop in U.S. Treasury Bond rates, which seems to have been spurred by the recent Japan earthquake and a nagging sense among global investors that U.S. Treasuries aren’t the safe haven most people thought they were.

Eyebrows were raised in financial bourses across the world when Pimco’s Total Return Fund slashed its U.S. Treasury holdings to zero this week in a clear sign that institutional investors are looking at the U.S. public debt picture and not liking what they see.

Mortgage yields are closely tied to bond yields and that’s a big reason why mortgage rates are so low, including those of 15-year, 30-year and adjustable rate mortgages.

So should you consider a 15-year mortgage? When interest rates fall that low, the monthly payments on 15-year mortgages – the chief barrier to using shorter mortgage terms – fall right alongside them. That means even lower mortgage payments, and a shorter repayment period on your home loan.

Let’s compare how a 15-year mortgage stacks up against a 30-year mortgage, particularly in this low interest rate environment. We’ll use slightly higher rates to compare the two, given the realities of most consumers’ credit scores (only homebuyers with close to perfect credit scores can get those low interest rates cited above).

Let’s look at a $200,000 mortgage, with an interest rate spread of 0.50%.

30-Year at 6.25%                    15-Year at 5.75%

Monthly Payment                                $1,231.43                                $1,660.82

1st Year: Interest Payment                    $12,433.62                              $11,274.25

Mortgage Balance                                $197,656.40                            $191,344.41

5th Year Interest Payment                     $11,769.93                              $9,041.90

Mortgage Balance                                $186,674.48                            $151,301.08

Total Interest Cost (Life of Loan)        $243,316.39                            $98,947.76

Total Savings: Almost $145,000

As the chart illustrates, $145,000 is a good chunk of change to save on your house. But beyond that, a 15-year mortgage isn’t a cakewalk. For starters, you will have to deal with the higher monthly payments that come with the shorter term.

If a 30-year mortgage holder took that monthly savings and invested the cash in an index mutual fund averaging 6%-8%, he or she would easily clear more profit from their investment than the 15-year mortgage consumer would make from the reduced interest (presuming that during those 30 years the consumer had the money and discipline to make those investments every month).

Plus, in today’s harsh work environment, a lower mortgage payment every month might be manna from heaven for a homeowner who’s been laid off or had his or her hours cut at work. After all, there’s a significant difference between a mortgage payment of $1,231.43 and $1,660.82.

In the end, it all comes down to this: Can you afford to make those extra mortgage payments every month without losing sleep? If so, then the current rate environment may represent an offer you shouldn't refuse.

With rates on 15-year loans at record lows, there’s no time like the present to shorten your mortgage loan term, and save huge bucks in the process.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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