Another Way to See the 15-Year Mortgage

NEW YORK (MainStreet) — Although the 15-year mortgage is invariably cheaper than the 30-year variety, it often gets little respect because of its larger monthly payments. Not so today. The 15-year deal is, in fact, quite appealing, offering substantial savings through rock-bottom rates.

Among the ideal candidates are homeowners who have plenty of equity and want to refinance at a lower rate. For them, the higher-principal payment on the 15-year deal may be easy to bear, allowing the borrower to focus on the low, low interest rate.

A BankingMyWay.com survey shows the average 15-year mortgage charging a scant 3.164%, versus 3.788% on the average 30-year loan.

The 15-year loan generally charges half to three-quarters of a percentage point less than the longer-term loan. But when the rates are this low, that margin is especially beneficial because it is bigger in relation to the overall rate.

At 3.164%, the 15-year loan charges 16.5% less than the 30-year deal. In June 2007, before the financial crisis, the 15-year charged 6.4% and the 30-year 6.73%. The 15-year, therefore, charged only about 5% less.

When the difference is very small, as in 2007, the 15-year loan does not provide enough savings to offset the big disadvantage: the larger monthly payment required to pay off the debt, or principal, in 15 years instead of 30. But today’s large margin relative to the overall loan rate can tip the balance in favor of the 15-year deal, so long as the payment is affordable.

At 3.164%,  you would pay just under $700 a month for every $100,000 borrowed. While that is significantly more than the $465 you would pay to borrow for 30 years at 3.788%, the 15-year deal would dramatically cut interest charges over the life of the loan – to $25,729 versus $67,500 for the 30-year deal.