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).