- 5 min read
- 15-Year mortgage loans have cheaper rates than 30-year loans, but have higher payments.
- Compare a15-year FRM monthly payment with a 30-year FRM.
- Budget your purchase based on your projected monthly payments, income and down payment.
15-Year Mortgage Rates: Lower Financial Costs, But Affordable?
A 15-year mortgage interest rate is lower than the rate for a 30-year mortgage. A mortgage loan is a long-term commitment with little flexibility. Before deciding which mortgage is best for you, make sure you can afford the payments.
Although interest rates are similar for purchase mortgage loans and refinance loans, borrower profiles and goals are different. If you are looking for a refinance loan, then read the Bills.com article about 15-Year mortgage refinance rates.
Shopping for a mortgage loan and the best mortgage rates is confusing. It is like putting together a complicated puzzle. You need to decide how much house you can afford to buy, as well as figure out the size of the monthly payment you can afford. You need to organize your finances so that you can qualify for your mortgage loan and meet the lender’s DTI (debt-to-income), LTV (loan-to-value), and FICO (credit score) requirements.
In order to help you make the best mortgage decision, it’s important for you to learn about:
- Today’s Mortgage Rates
- Comparing Mortgage Payments
- Choosing a Mortgage - Affordability before Savings
Today’s Mortgage Rates
Like all mortgage rates, 15-Year Mortgage Rates are constantly changing. According to Freddie Mac’s PMMS (Primary Market Mortgage Survey), 15-year fixed mortgage rates dropped from about 6% in early 2006 to about 3.14% in April 2012. In the next ten years, they continued to fluctuate. As of September 2022 they are 5.16%.
Check today’s mortgage rates, including 15-year fixed mortgage rates.
Comparing Mortgage Payments
In general, most purchase loans tend to be 30-year FRMs, especially for first-time buyers. A 30-year loan allows the borrower to take out a larger loan because the monthly payment is smaller and leads to a lower DTI ratio. It also allows the borrower to make pre-payments and lower long-term financial costs.
In order for you to get a better feel for the numbers, here is a comparison of a purchase Loan for $250,000, fixed interest rate, equal payments, 30-year FRM vs. a 15-year FRM:
|15-year FRM||30-Year FRM||Difference|
|Interest Rate||2.75%||3.50%||0.75% less|
|Monthly payment (Principal and Interest)||$1,697||$1,123||$574 more|
Note: this is only your principal and interest payments.
Based on the above example, the 15-year FRM has a larger monthly payment of $574. In order to qualify for a 15-year mortgage, based on the same down payment, purchase price, and loan amount, you will need $1500 - $2100 more of gross monthly income to qualify.
Choosing a Mortgage - Affordability before Savings
Figuring out how big of a loan to take or how much house to buy is confusing. If you want to take advantage of a 15-year loan, then you must match your income, down payment, and housing cost. The two main constraints are your:
- Available down payment, not including closing costs.
- Gross Income and debts: This includes your housing costs (principal, interest, property tax, and property insurance) as well as your reoccurring monthly debts (credit cards, student loans, auto loans, installment credit). Remember, the value of the property affects your monthly property tax and property insurance payments).
The examples below will help you understand the difference between a 15-year FRM with a lower interest rate and higher monthly payments, versus a 30-year FRM, based on mortgage interest rates from May 2012.
Example 1: House Affordability based on your income level. Here are the basic assumptions:
- Annual gross income: 72,000
- Monthly non-housing debt: $450
- DTI: 36%:
- Property tax and insurance is about 2% of house value.
- Excellent FICO score
- 15-year mortgage rate 3%, 30-year mortgage rate 3.75%
Based on those assumptions, your maximum monthly debt payments are $1680. You can purchase a $245,000 house with a 15-year mortgage or a $330,000 house with a 30-year loan. You will have to come up with a down payment of $49,000 for a 15-year loan or $66,00 for a 30-year loan.
|15-Year FRM||30-Year FRM|
|Monthly Mortgage (Principal and Interest) Payment||$1355||$1225|
Example 2: Income requirements based on 20% down payment requirement.
Here are the basic assumptions:
- Available down payment: 50,000, Maximum house: $250,000, Maximum Mortgage $200,000
- Monthly non-housing debt: $450
- Property tax and insurance are about 2% of the house value.
- Excellent FICO score.
- DTI 36%:
- Rates: 15-year mortgage rate 3%, 30-year mortgage rate 3.75%
Your maximum monthly debt payments are $2,173.
|15-Year FRM||30-Year FRM|
|Monthly Housing Payment||$1,774||$1,315|
|DTI including other debt||$2,174||$1,714|
Choosing a 15-year mortgage rate:
The 15-year mortgage loan and lower interest rate bring advantages over other loans, including:
- Fixed and stable payments
- Quicker pay-off, and you build more equity in your home. This is more important as you come closer to retirement age.
However, may those benefits against these financial factors:
- Stability and diversity of your income and asset base. Do you have sufficient reserves or other sources of income if one of the wage earners loses their job or takes a cut in their salary?
- Use extra funds to meet your current expenses and also save money. Your home is only one source of your equity.
Today's interest rates are historically low, both the 15-year fixed mortgage rates and the 30-year fixed mortgage rates. In the bottom line, weigh your ability to maintain your monthly payments based on the stability of your income and overall net worth and asset position. 15-year Mortgage rates are lower than 30-year rates, but if you cannot afford the payments, they will end up causing you stress and financial harm.