Low Rates Add Appeal to 15-Year Mortgage – WSJ.com
Lured by rock-bottom interest rates, a growing share of borrowers looking to refinance are opting for a 15-year mortgage instead of the traditional 30-year one.Fifteen-year fixed-rate loans accounted for nearly one in five refinance applications in October, according to the Mortgage Bankers Association. That’s up from 9.1% a year earlier and 7.5% in October 2007. The October data are the most recent available.
The move to shorter-term loans comes as rates on these mortgages have dropped to near historical lows. Rates on 15-year fixed-rate conforming mortgages averaged 4.46% last week, according to HSH Associates in Pompton Plains, N.J., well below their recent high of 5.25% in mid-June. Rates on 30-year fixed-rate conforming loans averaged 4.99%, or about half a percentage point higher.
To be sure, 15-year loans have their disadvantages. Even with the low rates, monthly payments can be substantially higher because the loan must be paid off over a shorter term. Borrowers are locked into the higher payments for the life of the mortgage.
The higher payments make 15-year loans less popular with home buyers, accounting for less than 5% of purchase applications. “It’s entirely a refinance phenomenon,” says Jay Brinkmann, chief economist of the Mortgage Bankers Association.
My parents always told while I was growing up that “buying a home is a great investment opportunity.” There are countless ways to increase your wealth through real estate investing. And one of those ways is to decrease the amount of interest you pay on your home. Taking out a 15 year mortgage versus a 30 year mortgage can save you thousands of dollars on your home purchase. The current mortgage rates in the Colorado Springs real estate area are 4.6% for a 15 year mortgage and 5.5% for a 30 year mortgage. Using these rates on a $200,000 loan, the homeowner would spend approximately $400 more per month with a 15 year loan, but would save approximately $13,000 in interest over the first 5 years of home-ownership and a whopping $131,500 over the life of the loan.
Despite the savings, however, a 15 year mortgage may not be the right course to take if you only plan on being in your home a few years. The benefits of a shorter-lived mortgage really only sink in after the first six or seven years. But if you plan on staying in your home for longer, the 15 year mortgage should definitely be considered, especially when looking at the cash you’ll be saving on interest payments. And nothings beats owning your home free and clear. My parents used a 15 year mortgage to purchase their most recent home (in 1988). They now own the home completely and only pay maintenance and utilities for their housing expenses. What a smart decision!
