15 year mortgage looks great with a low interest rate
When most people buy a home, the default is that they should have a 30 year mortgage. For many people, the 30 year fixed-rate mortgage makes sense because of its low payment, but the risk is if you don’t look for other options that might benefit you.
Today we’re taking a look at the benefits of a 15 year fixed rate mortgage. We will discuss why this makes sense in the low interest rate environment. Finally, we’ll go into who this mortgage term makes the most sense when searching buy or refi a home.
How low are the prices?
Freddie Mac has been tracking conventional tariffs in a weekly poll for nearly 50 years. Currently, 15 and 30 year mortgage rates are within a few basis points of All time lows.
Since the interest rates are where they are, this can make a 15 year loan a lot more palatable as the payment is much more manageable at a lower interest rate.
Benefits of a 15 Year Mortgage
A 15 year fixed rate mortgage has three main advantages. These factors are interrelated.
Interest savings over time
You pay less interest depending on the term. If you ever look at a graph of a 30 year loan amortization schedule, you will find that at the start of the loan you are paying more interest than the principal for a significant period of time.
If you compare that to shorter term loans like the 15 year fixed loan, you will find that you pay more for the balance than the interest each month. Depending on the loan size, it is not unreasonable to believe that you could save tens of thousands of dollars over the life of the loan.
It is important to note that this maturity effect persists even if the interest rate remains the same, i.e. it functions independently of interest effects. Convince yourself with our Payback calculator.
As an example, let’s say we had a $ 200,000 30 year loan at 2.98% interest on a Michigan home. The monthly payment is $ 841.05 and you pay $ 102,778.78 in interest.
Now let’s change this term to 15 years and keep everything else constant. The monthly payment is higher at $ 1,379.24, but the amount of interest you pay is more than halved at $ 48,263.26.
Lower interest rate
Although we just showed that the benefit of lower interest rates applies to the same interest rate, in practice you also benefit from a lower interest rate.
The reason for this comes back to the market concept of inflation. The mortgage rates are based on the price of bonds in the country Mortgage Backed Securities Market. Bond investors are looking for a safe return while keeping up with inflation.
In a healthy economy, inflation tends to rise over time, so longer-term interest rates pay higher than those with shorter maturities. With a longer term, investors are forced to forecast inflation further in advance.
As an example, at the time of this writing, you could get a 30 year fixed loan at an interest rate of 2.99% (3.225% APR).1 For comparison: A 15-year loan can be taken out for 2.5% (2.924% APR).2
If interest rates tend to be lower in general, as they are now, particularly low interest rates can help mitigate the effects of the fact that your payment is higher because of the shorter maturity.
To give you an idea of how low the interest rates are on a 15 year loan right now, if you pay enough points it is possible to lower your interest rate below 2%. Although Mortgage Discount Points means paying more upfront when you close, you can calculate the break-even point at which your monthly savings outweigh the closing costs. If you are planning on staying in the house past the break-even point, it makes sense to buy the points.
If you’re looking for your options, check out ours Mortgage Interest Page. Selected offers from our latest price offers are displayed here.
Pay your mortgage faster
Due to the shorter term, you will pay off your mortgage faster with a 15-year loan than with a comparable 30-year loan. This can really help you feel like you are making progress because your balance is falling so much faster.
By the time you would pay back $ 10,000 on a $ 200,000 loan with a 30 year term, you would pay off about $ 30,000 over a 15 year term.
Who is a 15-year fixed-rate mortgage for?
A 15-year fixed-rate mortgage has its advantages, of course, but it makes more sense for some clients than for others. Let’s break that down.
- You can afford a higher payment without jeopardizing other financial goals. If you are satisfied with a higher payment, the interest savings alone can make the 15-year fixed period worthwhile. On the flip side, if you have other goals like saving for retirement or a college fund, you can choose to stick to a 30 year tenure and pay more to the headmaster for as long as you can.
- You are preparing for retirement: Once people have established themselves in their careers, they tend to make more money. As you get older, you can afford a bigger mortgage payment while looking to retire. Refinancing in a shorter term allows you to pay off your mortgage so that you have one less bill in retirement.
As you can see, a 15 year mortgage has its advantages, even if it is not for everyone. While we’ve focused on the 15-year mortgage in this article, it’s worth noting that there is a good chance you will find an interest rate you like regardless of your term, as mortgage rates have been right at record lows recently.
If you want to start, you can do so online with Rocket mortgage® by Quicken Loans®. You are also welcome to call one of our real estate loan experts at (800) 785-4788. If you have any questions, please leave a comment for us below.
1 The payment for a 30-year fixed loan of $ 200,000 at 2.99% (3.225% APR) is $ 842.13 for the closing cost of 1.875 points and a LTV of 74.91% . One point equals one percent of your loan amount. The payment does not include taxes and insurance. The actual payment amount will be higher. Some states and counties may have restrictions on the maximum loan amount. This tariff is valid from July 23rd, 2020.
2 The payment for a 15-year fixed loan of $ 200,000 at 2.50% (2.924% APR) is $ 1,333.58 for the upon completion cost of 1,875 point (s) and a LTV of 74 , 91%. One point equals one percent of your loan amount. The payment does not include taxes and insurance. The actual payment amount will be higher. Some states and counties may have restrictions on the maximum loan amount. This tariff is valid from July 23rd, 2020.
Subscribe to Zing! Blog
Would you like to impress your friends and family with our knowledge?
If so, subscribe now to home, money and living tips delivered straight to your inbox.