As Interest Rates Come Down, 15-Year Mortgages Lose Appeal

15-year fixed-rate mortgages offer smaller interest rate discounts to this year's home buyers, and may not be as valuable.

May 13, 2020 by Dan Green

The Housing Headline

15-year fixed-rate mortgages are less of a value in 2020.

The News Behind The Housing Headline

Home buyers are getting less of an interest rate discount this year for choosing 15-year fixed-rate mortgages over 30-year ones.

According to government-backed mortgage agency Freddie Mac, the average interest rate spread between a 15-year and 30-year fixed-rate mortgage is 0.25 percentage points smaller this year as compared to the average of last decade.

Interest rates for today’s 15-year fixed-rate mortgage are near 2.75 percent. Rates for 30-year fixed-rate mortgages are near 3.25 percent.

The interest rates appear similar. However, because 15-year mortgages payback in half the time, monthly payments for a 15-year mortgage are much higher than for a comparable 30-year mortgage.

At today’s rates, assuming a mortgage loan size of $200,000:

  • A 15-year fixed-rate mortgage payment is $1,355
  • A 30-year fixed-rate mortgage payment is $872

Your credit score and the type of home you buy will affect the final mortgage rate you get from a lender.

Why This Housing News Matters To You

Home buyers rarely finance their purchases with 15-year mortgages. Only 6 percent of home buyers use them, according to Freddie Mac.

However, as the interest rate difference shrinks between a 15-year and a 30-year mortgage, the number of home buyers opting for a 15-year loan is expected to shrink as well.

There just aren’t enough reasons for home buyers to opt for 15-year financing.

Sure, 15-year mortgages reduce your total interest payments made over time; and, you repay your loan balance more quickly. However, you also lock yourself into a higher monthly payment and reduce your maximum home purchase price.

Because interest rates are so similar right now, a more flexible approach for this year’s buyers, then, is to opt for the longer-term, higher-rate 30-year fixed-rate mortgage and pay it more aggressively than the lender requires.

Remember: nothing prohibits you from making extra payments on your mortgage each month. Every homeowner has the right to increase their monthly payment to shorten the payback time on their loan.

At today’s rates, increasing your 30-year payment by half reduces your loan term to just over 15 years; and, the cost of the half-point increase from the 30-year adds extra interest payments equal to roughly five percent of your mortgage’s starting loan size.

For a lot of home buyers, this strategy makes sense. As interest rates widen between the 15-year and 30-year mortgage in the future, though, the math stops working.

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