Why a 15 Year Mortgage Makes Sense for Home Buyers Today

Home mortgages generally have a duration of 30 years.

However, a compelling case can be made for new and existing home buyers to take out a 15 year mortgage today. Accordingly, for home owners with an existing 30 year mortgage, they should seriously consider refinancing that 30 year loan into a lower interest rate 15 year loan. But not for the purpose of making reduced monthly payments.

The reason is straightforward. Interest rates are now so low that the borrower probably will be able to make close to the same monthly payment for 15 years in lieu of a similar payment for 30 years and own the home mortgage free at the end of the 15 year period. That's 15 years in less total interest paid and mortgage free ownership at the end of the faster pay off period.

Fringe 15-year mortgage becomes hot property is subtitled 'More borrowers are choosing home loans they can pay off faster:'

"The 15-year loan, long considered a fringe character in the mortgage scene, is riding a wave of popularity.

Thanks to low interest rates, many borrowers are opting for the deal that allows them to pay off their mortgages in half as much time as the traditional 30-year mortgage. . . .

The 30-year mortgage became the standard in lending because its lower monthly payments made real estate affordable to more Americans. While the 30-year remains king, the gap between the two loans’ popularity is shrinking. “The 15-year loan has gone from really being almost a non-issue item to a new trend,” says Stu Feldstein, president at SMR Research, which tracks mortgage data.

The key to the shift is lower interest rates, which makes it easier for borrowers to manage payments on 15-year loans—and still pay off their notes in half the time. Fixed rates on 15-year mortgages average 2.81%, down from 3.36% a year ago and 5.85% in mid-December 2007, according to mortgage-information website HSH.com.

The 15-year loans are also a lot cheaper than 30-year fixed-rate mortgages, which average 3.44%. That 0.63-percentage-point spread is wide compared with historical figures. Before the housing crisis, 15-year fixed-rate mortgages were typically just 0.25 to 0.35 percentage points cheaper than their 30-year counterparts, according to HSH.com.

Homeowners who are refinancing stand to gain the most from the spread between the two loans. In the past, refinancing from a 30-year into a 15-year mortgage usually meant ending up with a bigger monthly payment in exchange for a slightly lower rate. But in today’s market, the much lower rate allows some borrowers—particularly those who have been paying down a 30-year mortgage for several years—to make this switch without seeing an increase in that payment.

For instance, a couple who signed up for a 30-year $300,000 mortgage in January 2004 with a 5.75% fixed rate would have a roughly $1,751 monthly payment. By refinancing the remaining balance of about $255,828 into a 15-year fixed rate loan at 2.81%, the new monthly payment would be slightly lower at almost $1,744.

Longer term, the benefits add up even more. By reducing the repayment period, the couple would save just over $127,300 in interest over the life of the loan. In addition, they are building equity into their home faster than borrowers with longer-term mortgages."

Summing Up

Lower interest rates mean lower monthly payments, all other things being equal.

But it's better than that for those who are willing to keep making the same monthly payment.

They will pay less interest and own the home with no mortgage obligation several years earlier than those who continue with a 30 year mortgage.

And they will be able to do so at essentially no extra monthly payment due to today's historically low interest rates.

The 15 year mortgage is certainly worth careful consideration for both new buyers and for those individuals who currently have a 30 year mortgage and are able to refinance their loan.

Thanks. Bob.