A growing number of mortgage applicants, especially those refinancing older loans, are opting for 15-year mortgages instead of the 30-year variety, according to the Mortgage Bankers Association.
While the benefits of lower interest charges on 15-year deals seem obvious on the surface, the choice isn’t always as simple as it looks. A 15-year deal may not appeal at all to someone buying a home, but could offer real savings to someone refinancing an older mortgage.
About 20% of mortgage applicants opted for 15-year, fixed-rate loans in October, up from 9.6% a year earlier and 8.8% two years earlier, the MBA says, noting that most 15-year applications involve refinancings rather than home purchases.
The initial appeal lies in the low rates. The BankingMyWay.com Survey shows the average 15-year loan charging just 4.581%, versus 5.132% on 30-year fixed-rate loans.
A lower rate means lower interest charges. Despite that, most homebuyers shy away from 15-year loans because payments must be higher to retire the debt in 15 years instead of 30.
For a $300,000 loan, monthly payments at the average rates would be $2,307 for a 15-year loan, $1,635 for a 30-year one. The 15-year loan would charge $115,335 in interest over its life, compared to $288,513 for the 30-year deal.But the 15-year deal can be much more appealing for a homeowner who has already had the loan for some time. Consider a homeowner who took out a $300,000 30-year loan 15 years ago, charging 9%, about the going rate at the time. The monthly payment would be $2,414., according to the Mortgage Loan Calculator.
Today, the homeowner would still owe $237,991 and would pay about $196,000 in interest over the next 15 years. Refinancing to a 15-year loan at 4.581% would cut the monthly payment to $1,830 and reduce total interest costs to about $91,000. With a 30-year loan at 5.132%, the payment would be even lower, at $1,297 a month. But the borrower would pay much more in interest, $229,000, if the loan were kept for the full 30 years.