15-Year Mortgage Loans - Save with Lower Interest Rates
An increasing number of borrowers are looking for 15-year mortgage loans, especially refinance loans. The combination of a desire to be debt free AND the ability to make larger monthly payments makes the 15-year loan an attractive option.
If you are looking for a mortgage loan, the 15-year fixed mortgage has an added bonus – a lower interest rate. In fact, 15-year mortgage rates in June 2012 were under 3%. As a note of comparison, a 30-year FRM (Fixed Rate Mortgage) was about 3.5%.
A 15-year fixed mortgage loan is one of many mortgage products. In order to help you decide whether a 15-year mortgage is appropriate for you:
- Compare payments for different mortgage terms
- Weigh the advantages and disadvantages of a 15-year FRM
- Consider Refinancing into a 15-year FRM
- Prepare yourself for a 15-Year FRM
Compare Payments for Different Mortgage Terms
Your monthly payment includes principal and interest as well as insurance and property taxes, which are dependent on the value of the house. Also, mortgage loans include different types of costs and fees, including bank fees such as origination points, discount points, and application fees. Remember to shop around and compare mortgage interest rates and fees).
In order to compare the different loan options and the right mortgage loan, get a feel for how much you will have to pay each month. The chart below illustrates the difference between a 15-year FRM, 30-year FRM and a 30-Year FRM, with accelerated payments.
|15-Year FRM||30-Year FRM||30-year FRM with accelerated payments|
|Monthly Payment||$1,711||$1,140||$1,340 (extra $200 per month)|
|Total Interest Charges||$58,063||$160,446||$118,344 (finish loan 7 years earlier)|
Interest rates are based on Wells Fargo interest rate table for June 4, 2012. Note: The rates vary depending on credit score, LTV and other underwriting criteria. Also, make sure that you carefully compare interest rates and fees.
In the above example, the 15-year mortgage loan monthly payment is $571 more than the 30-year loan. Assuming a DTI (debt-to-income) ratio requirement of 36%, you will need an additional $1568 in monthly income to qualify for the 15-year mortgage. Your overall income requirement will depend on the amount of your property tax, property insurance and other monthly non-housing debt payments.
If you are considering moving before the end of the loan, then you will want to weigh the monthly payments, against the total interest payments and remaining balance. Based on the above example, the table below shows the total interest and remaining balance after a five-year period:
|15-Year FRM||30-Year FRM|| |
30-Year FRM - Accelerated Payment of $200 per month
|Total Payments for 5-year period||$102,688||$68,408||$80,408|
|Interest for first 5 years||$30,994||$43,129||$41,494|
|Balance at end of 5 years||$178,305||$224,721||$211,587|
Obviously, your financial cost decreases as you make larger payments and pay off the loan quicker. Weigh carefully your financial capabilities and your desire to put more equity into your home.
Advantages and Disadvantages of a 15-year FRM
The obvious advantage to a 15-year FRM loan is its overall financial savings.
- Financial Costs: Anytime you pay off-your loan quicker, you will save in financial costs. (Compare loans based on their interest rates, mortgage fees, and the time you expect to maintain the loan).
- Build Equity: The second advantage is that you build more equity in your house. Your house is an important element of your equity and net worth. As you get closer to retirement, when your income will be less, it is a good idea to be mortgage free.
- Ease in selling House: By building equity in your house, you will have more flexibility to sell the house when you want or take out a home equity loan.
Before you take a 15-year loan, consider the downside, higher monthly payments.
- No Payment Flexibility: Mortgage loans are long-term commitments and have little flexibility. The consequence of not making your payment on time starts with a hit on your credit card and can lead to foreclosure.
- Non-diversification of Assets: You are putting a large amount of your equity into your house. Make sure that you are not putting too much of your saving in your house and not in other investment and retirement vehicles.
Refinancing into a 15-year FRM
Recently, 15-year mortgage loans, especially refinance mortgage loans, have become more popular with borrowers. 15-year refinance interest rates are very low which makes the payments more affordable.
Here is an example to show why refinancing into a 15-year loan is popular with borrowers who have high interest loans:
|Term||30 years. 25 years left.||15-year|
The borrower has huge financial savings and pays $69 more a month on their new loan. By stretching out the loan to a 16-year loan you can keep the same payments. (Many lenders, like Quicken Loans Yourgage, have mortgage loan products with more flexible loan periods).
It is no wonder that borrowers are looking to make the effort to refinance their loans into lower term loan.
Preparing yourself for a 15-Year FRM
There are different mortgage products available, including fixed rate mortgages and variable rate mortgages. In a low interest rate market, most borrowers prefer fixed rate mortgages.
If you have stable high income, then a 15-year mortgage loan is a good option. Before taking a 15-year FRM, make sure that you:
- Create and maintain a budget and familiarize yourself with your cash flow. Keep track of your DTI and saving ratio.
- Have a strong and stable cash flow.
- Build an emergency fund to cover at least expenses for six months. Sufficient savings to weather a financial storm
- Keep your other debt down. Don’t make high mortgage payments and then turn to your credit card to cover a shortfall in income.