When most people buy a house, the default mindset is that you should have a 30-year mortgage. For lots of people, the 30-year fixed-rate mortgage makes sense because of its low payment, but the danger comes when you don’t look at other options that may benefit you.
Today, we’ll take a look at the benefits to a 15-year fixed-rate mortgage. We’ll discuss why this especially makes sense in the low-rate environment we find ourselves in. Finally, we’ll touch on who this mortgage term makes the most sense for when looking to buy or refi a home.
How Low Are Rates?
Freddie Mac has been tracking conventional rates for nearly 50 years in a weekly survey. Rates right now for both 15-year and 30-year mortgages are within several basis points of all-time lows.
Because rates are where they are, this can make a 15-year loan that much more palatable because the payment is much more manageable at a lower rate.
Benefits Of A 15-Year Mortgage
There are really three major benefits to a 15-year fixed-rate mortgage. These factors are related to each other.
Interest Savings Over Time
You pay less interest based on the term. If you ever look at a graph of an amortization schedule for a 30-year loan, you’ll notice that for a significant time frame at the beginning of the loan, you pay more toward interest than you do on the principal.
If you compare that to shorter-term loans like the 15-year fixed, you’ll notice that you start by paying more toward the balance than the interest every month. Depending on the loan amount, it’s not unreasonable to think that you could save tens of thousands of dollars over the life of the loan.
It’s important to note that this term effect holds up even if the interest rate stays the same, so it operates independently of rate effects. You can see this for yourself with our amortization calculator.
As an example, let’s say we had a 30-year loan for $200,000 with a 2.98% interest rate on a house in Michigan. The monthly payment is $841.05 and you pay $102,778.78 in interest.
Now let’s change that term to 15 years, holding everything else constant. The monthly payment is higher at $1,379.24, but the amount of interest you pay is more than cut in half at $48,263.26.
Lower Interest Rate
Although we’ve just shown that the benefit of paying less interest holds true even when the rate is the same, in practice, you also get the benefit of a lower rate.
The reasoning for this comes back to the market concept of inflation. Mortgage rates are set based on the price of bonds in the mortgage-backed security market. Bond investors are looking for a safe return while making sure it keeps up with inflation.
In a healthy economy, inflation tends to rise over time, so longer-term rates are going to have a higher interest rate than those with a shorter term. With a longer term, investors are forced to project out 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 By comparison, a 15-year loan could be had for 2.5% (2.924% APR).2
When rates are generally trending lower as they are now, especially low interest rates can help mitigate the impact of the fact that your payment is higher because of the shorter-term.
To give you an idea of how low rates are on a 15-year loan right now, if you pay enough points, it’s possible to get your rate down below 2%. Although mortgage discount points mean paying more upfront at closing, you can calculate the breakeven point at which your monthly savings would outweigh the closing costs. If you plan to stay in the home past the breakeven point, it makes sense to purchase the points.
If you’re looking into your options, check out our mortgage rates page. This shows selected offerings from our most current pricing offers.
Pay Off Your Mortgage Faster
By virtue of the shorter term, you end up paying your mortgage off faster with a 15-year loan than you would on a comparable 30-year loan. This can really help you feel like you’re making headway because your balance is lowered so much faster.
Who Is A 15-Year Fixed Mortgage Right For?
There are obviously benefits to a 15-year fixed mortgage, but it makes sense for some clients more than others. Let’s break this down.
- You can afford a higher payment without compromising other financial goals. If you’re comfortable with a higher payment, the interest savings alone can make the 15-year fixed worth it. On the other hand, if you have other objectives like saving for retirement or a college fund, you might choose to stick with a 30-year term and put extra toward the principal while you can.
- You’re getting ready to retire: As people become well-established in their careers, they tend to make more money. When you get older, you may find yourself in a better position to afford a bigger mortgage payment while also looking toward retirement. By refinancing into a shorter-term, you can look to pay your mortgage off to have one less bill during retirement.
As you can see, having a 15-year mortgage has its advantages, even if it’s not for everyone. Although we’ve focused on the 15-year mortgage in this article, it’s worth noting that there’s a good chance you’ll find a rate you like no matter your term because mortgage rates recently have been hanging right around record lows.
If you’d like to get started, you can do so online with Rocket Mortgage® by Quicken Loans®. You can also feel free to give one of our Home Loan Experts a call at (800) 785-4788. If you’ve got questions, leave a comment for us below.
1 The payment on a $200,000 30-year Fixed-Rate Loan at 2.99% (3.225% APR) is $842.13 for the cost of 1.875 point(s) due at closing and a loan-to-value (LTV) of 74.91%. One point is equal to one percent of your loan amount. Payment does not include taxes and insurance. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply. This rate is valid as of 07/23/2020.
2 The payment on a $200,000 15-year Fixed-Rate Loan at 2.50% (2.924% APR) is $1,333.58 for the cost of 1.875 point(s) due at closing and a loan-to-value (LTV) of 74.91%. One point is equal to one percent of your loan amount. Payment does not include taxes and insurance. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply. This rate is valid as of 07/23/2020.
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