As Mortgage Rates Keep Falling, More Are Scratching 15-Year Itch
Original Post Date: December 17, 2012
By: Annamaria Andriotis
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.
Nearly 16% of the fixed-rate mortgages that lenders sold to Freddie Mac during the third quarter were 15-year loans, up from almost 10% a year prior, according to the agency’s data. (That data doesn’t include refinancings.) And 15-year mortgages accounted for nearly a third of refinanced loans during the first seven months of this year, according to the latest data by CoreLogic. The figure has been climbing since 2007, when they made up just 8.5% of refinancings.
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. That means they could be more likely to get approved for home-equity loans and borrow a larger amount against their home.