Curve

Mortgage Trends : Homeowners Flock To 15-Year Mortgages Over 30-Year Mortgages

Dan Green
The Mortgage Reports contributor

Freddie Mac Quarterly Refinance Transition

The 30-year fixed rate mortgage has long been the mortgage product of choice among U.S. homeowners. Today, the 15-year fixed rate mortgage is challenging that position.

From Loudoun County, Virginia to Bellevue, Washington and everywhere in between, the 15-year fixed rate mortgage is gaining in popularity. It’s not surprise why, either. For homeowners wanting to minimize their long-term interest costs, the 15-year fixed rate mortgage can be an obvious choice.

Click here to see 15-year mortgage rates (Feb 22nd, 2019).

U.S. Homeowners : A New Mortgage Mindset

Toward the end of 2011, mortgage rates plunged, falling to the lowest levels of a lifetime. Week after week, concerns over the solvency of Greece; about the health of the U.S. jobs market; about the strength of housing pushed mortgage rates lower and lower still.

Global investors sought the safety of U.S.-backed mortgage bonds in an uncertain global economy.

It’s been a recurring theme in mortgage markets since 2010, actually. Global strife plus economic uncertainty causes U.S. mortgage rates to fall. U.S. homeowners have learned to exploit it, too, grabbing the best mortgage deals a willing market is able to make.

For many, last quarter, that meant abandoning the familiar confines of the 30-year fixed rate mortgage in favor of a 15-year fixed rate mortgage instead — especially among homeowners who’ve paid a few years into their existing 30-year mortgage already. 

1 in 4 conforming mortgage applicants refinanced their 30-year fixed rate loan into a 15-year fixed rate last quarter. Five years ago, that figure was 1 in 20.

Click here to see mortgage rates (Feb 22nd, 2019).

Make A 15-Year Fixed Rate Mortgage Payment?

There’s no doubt that 15-year fixed rate mortgage rates are low. They’re bargain-basement low, actually. And, it’s not just a conventional loan thing, either — FHA and jumbo 15-year fixed rate mortgage rates are low, too. There are interest rate savings out there for everyone who wants it, and who qualifies.

To want the 15-year mortgage, though, you’re going to have to want its payment.

See, fundamentally, a 15-year fixed rate mortgage is the same as a 30-year fixed rate one. You have your starting loan balance, a non-changing interest rate and a monthly payment that’s due to the bank. What makes a 15-year fixed rate mortgage different is its term — the period of time over which the loan must be repaid in full.

A 15-year fixed rate mortgage is repaid over 15 years. A 30-year loan is repaid over 30. As a result, the payments on a 15-year fixed rate mortgage are higher as compared to a comparable 30-year loan — you’re compressing the same debt repayment into a smaller period of time.

At today’s rates, the monthly mortgage payment for a 15-year fixed rate mortgages is 48% higher than for a comparable 30-year fixed rate loan.

Making bigger mortgage payments may seem counter-intuitive to making a household budget, but, in the long-run, it’s an excellent savings plan. It’s one of the reason people like 15-year mortgages so much. When the 15 years are up, you’re mortgage-free for good.

Click here to see mortgage rates (Feb 22nd, 2019).

The Lure Of The 15-Year Fixed Rate Mortgage

Using today’s mortgage rates, the monthly mortgage payment for 15-year fixed rate mortgage is nearly 50% higher than the monthly mortgage payment for a comparable 30-year fixed-rate mortgage.

A loan in Potomac, Maryland, for example, at the local conforming loan limit of $625,500 carries a 30-year fixed payment of $2,986. If that mortgage was a 15-year fixed rate mortgage, the payment would jump to $4,410. Again, a near 50 percent increase.

But here’s another statistic to consider :

  • With a 30-year term, after 12 months, 31% of the monthly payment goes to principal
  • With a 15-year term, after 12 months, 63% of the monthly payment goes to principal

In other words, even in its early years, a huge percentage of your 15-year fixed rate mortgage goes towards paying off your home versus just a tiny portion with the 30-year fixed rate mortgage.  

Long-term, with a 15-year fixed rate mortgage, you can save a lot on “interest paid”, too.

On a $625,000 mortgage, a 15-year, fixed-rate mortgages requires $281,000 less mortgage interest over the life of your loan than a comparable 30-year fixed-rate mortgage. That kind of money is enough to send multiple children to 4 years of an expensive private college. 

It can also buy a vacation home.

Click here to see mortgage rates (Feb 22nd, 2019).

See Today’s 15-Year Fixed Rate Mortgage Rates

The 15-year fixed rate mortgage isn’t for everyone. Bigger payments last all 15 years, whether you want them to or not. For a household accustomed to paying on a 30-year term, the 15-year loan can be a shock. However, when managed well, the benefits are big.

See what a 15-year mortgage can do for you.

Click here to see mortgage rates (Feb 22nd, 2019).