Save $45,000 Per $100,000 Borrowed With A 15-Year Fixed Rate Mortgage

Dan Green
Dan Green
The Mortgage Reports Contributor
December 29, 2011 - 2 min read
Refinance Transition Study Q3 2011

The 30–year fixed rate mortgage is less popular among refinancing homeowners.

Record–low mortgage rates are drawing refinancing households into shorter–term fixed–rate product such as the 20–year fixed–rate mortgage and the 15–year fixed–rate mortgage.

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Demand For 15–Year Fixed Rate Hits 8–Year High

According to a Freddie Mac report, as conforming mortgage rates have dropped nationwide, so has the average mortgage loan term.

Of all Freddie Mac–to–Freddie Mac refinances last quarter, 40% of refinancing homeowners who started with a 30–year fixed–rate mortgage transitioned into loans of shorter–term loan, led by the 15–year fixed–rate mortgage.

Not since 2003 have homeowners abandoned 30–year fixed rate mortgages so quickly. And, it’s easy to understand why the 15–year fixed–rate mortgage is so popular, too.

As with other mortgage types, the conforming 15–year fixed rate mortgage rate made a bevy of all–time lows this year. Rates just kept dropping. The difference with the 15–year fixed rate mortgage, though, is that its rates are falling faster as compared to its peers.

Check this mortgage rate difference between the 15–year and 30–year fixed–rate mortgage :

  • January 2000 – June 2011 : Average mortgage rate difference of 0.49%
  • July 2011 – September 2011 : Average mortgage rate difference of 0.82%

Today’s 15–year fixed–rate mortgage is “$2n sale”. Homeowners – from San Francisco, California to Arlington, Virginia– know a good deal when they see one.

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Is The 15–Year Fixed Rate Payment Too Expensive?

As homeowners switch into 15–year fixed rate mortgages, they’re faced with a trade–off.

They get lower mortgage rates, but higher monthly mortgage payments. This is because, with a 15–year fixed–rate mortgage, monthly payments are compressed over a shorter period of time as compared to a 20–year or 30–year fixed rate loan.

At today’s rates, a 15–year fixed–rate monthly mortgage payment is 48% higher as for a comparable 30–year fixed–rate loan. That’s true for all loan sizes.

Now, 48% more may seem like a much bigger payment each month (and it is!), but remember that with a 15–year fixed rate mortgage, over the life of the your loan, you’ll pay total interest costs to your lender equal to about 26% of your original starting balance.

By contrast, with a 30–year fixed rate mortgage, your long–term interest costs are roughly 71% of your original starting balance.

In other words, at today’s mortgage rates, for every $100,000 borrowed, with a 15–year fixed rate mortgage, you’ll save $45,000 in interest costs over the life of your mortgage as compared to a 30–year fixed rate mortgage.

That’s major.

Get A Mortgage Rate Quote For Your Loan

Whether you have an adjustable–rate mortgage, 30–year fixed rate loan, or otherwise, it’s a great time to at least consider shortening up your loan term. There’s short–term pain in the form of higher monthly payments, but the loan–term gains are palpable.

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