Posted February 28, 2014Tweet
The 15-year mortgage is emerging as this year's "great mortgage deal".
For mortgage applicants who can manage the payments, a 15-year term is worth consideration. Mortgage rates for the loan are extremely low as compared to equivalent 30-year products.
There's a sale on today's 15-year rates. You can save a lot of money with a 15-year fixed rate home loan.
Each week, Freddie Mac publishes its Primary Mortgage Market Survey (PMMS). The survey reveals the average mortgage rates of more than 100 U.S. lenders for borrowers showing strong credit, reasonable debt-to-income ratios, and sufficient home equity.
The average 30-year fixed rate mortgage rate goes for 4.37% for mortgage applicants willing to pay 0.7 discount points at closing plus the typical closing costs associated with a mortgage.
In Orange County, California, therefore, where the 2014 conforming loan limit is $625,500, a homeowner receiving a 30-year conforming mortgage rate quote of 4.37% should expect to pay an additional $4,379 in closing costs as "discount points".
For the same amount of points, 15-year rates are considerably more inexpensive.
The same Freddie Mac survey shows the average 15-year fixed-rate mortgage rate at just 3.39% nationwide -- a 0.98 percentage point discount from the 30-year mortgage rates, which is nearly 3x wider than the historical mortgage rate spread.
The lower rate of the 15-year loan, plus its shorter term, is helping U.S. homeowners save monstrous amounts.
When you "go 15", you reduce your total interest paid over the life of your loan and it can be enough to send multiple children to college; or, to build a diversified retirement portfolio; or, to meet other personal financial goals.
Have you seen today's low mortgage rates?
The payment schedule by which you "pay off" a mortgage is known as an amortization schedule. With amortization, there are two basic truths:
Because of these truths -- and because 15-year mortgage rates are currently cheap -- homeowners using a 15-year mortgage can, literally, save hundreds of thousands of dollars while paying off their homes.
Consider a fictional buyer in the Lincoln Park neighborhood of Chicago, Illinois. With a $350,000 loan size, the buyer wants to compare the cost of a 15-year mortgage to the cost of a 30-year one.
Over its life, the buyers determines, the 15-year mortgage will require interest payments totaling $97,000. Via a 30-year loan, interest payments reach $279,000.
The 15-year mortgage reduces interest costs sixty-five percent.
In high-cost areas such as Loudoun County, Virginia; San Jose, California; and New York City, New York, the savings increase. Homeowner borrowing at the local conforming loan limit of $625,500 will repay the same amount of principal but with $325,000 less interest paid to the bank.
That's a lot of cash saved.
Long-term savings render the 15-year fixed-rate mortgage attractive, but the program may be impractical to some.
As one example, the 15-year loan's amortization schedule calls for very little interest to be paid to the bank. This means that the relative tax benefits of a 15-year loan can be small as compared to a comparable 30-year term.
Less interest paid can reduce mortgage interest tax deductions for homeowners who claim it with their federal tax returns.
As another example, payments on a 15-year mortgage are considerable higher than payments for 30-year ones. This is because the loan is being repaid across a shorter span of time.
Today, payments on a 15-year mortgage are 42% higher than payments on a 30-year. Bigger payments leave homeowners with smaller amount of disposable income which can crimp certain household savings goal and the ability to meet very-short-term monetary.
Or, third, if you plan to move within the next 5 years or so, attempting to pay your loan to term may unwise anyway -- especially with adjustable-rate mortgage rates as low as they are. Short-term homeowners may be best paired with a 5-year or 7-year ARM.
Freddie Mac reports the 5-year ARM at 3.05% nationwide.
15-year fixed rate mortgages can be a terrific way to save money on your mortgage; and, to own your home faster. In addition, for homeowners with FHA-insured mortgages, using a 15-year loan term can get you access to lower mortgage insurance premiums.
Take a look at today's low 15-year rates. Rate are available online with no cost, with no obligation, and no social security number is required to get started.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.