In the days before the pandemic, 15-year mortgages – with their typically hefty monthly payments – were far too expensive for many people. refinance their homes. Borrowers often just grabbed another 30-year home loan, America’s go-to mortgage.
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But with the COVID crisis keeping mortgage rates in the basement, even the 15-year option looks cheap. That’s especially true now, with 15-year yields hitting an all-time low in mortgage giant Freddie Mac’s latest survey.
More and more borrowers are opting for shorter-term loans: In May, 15.8% of all 15-year mortgages accounted for 15.8%, up from just 5.5% in May 2019, according to the latest data from the Municipal Institute.
Here’s how to evaluate whether a 15-year fixed-rate mortgage is right for you — and how to get one of the lowest 15-year rates today.
Today’s 15-Year Mortgages Offer Big Savings
Average rates on 30-year mortgages are well below 3% currently, due to investor concerns that the COVID-19 delta variant could torpedo the economy’s comeback from the pandemic.
Thirty-year yields this week average 2.77%, not far from the typical early January rate of 2.65%, the lowest in the 50-year history of Freddie Mac’s weekly survey.
But the interest on 15-year loans is even cheaper and is currently at an all-time low: only 2.10% on average.
Let’s be clear: because of their shorter repayment period, 15-year mortgages shall gives you a much higher monthly payment than a 30 year loan. But with 15-year yields at an all-time low, payments will also be as low as possible.
Here’s an example of how you can now save on a 15-year mortgage: In early August 2019, when the average for a 15-year fixed-rate mortgage was 3.20%, a $250,000 loan would set you back $1,751 per month. have cost, or $21,012 per year.
But at the current average rate of 2.10%, that same loan will cost you $1,620 a month, or $19,440 per year — for an annual savings of nearly $1,600.
15-Year Mortgage vs. 30-Year Loan
In fact, the shorter-term mortgage will cost you tens of thousands of dollars less in total interest than a 30-year loan.
If you were to refinance a $200,000 balance at today’s average rates, your monthly payment would be: $1,296 with a loan of 15 years, but only $819 with a 30 year mortgage – a difference of $477.
That may be a deal breaker for some, but considering the lifetime interest you would save with the shorter loan term, the high monthly payment isn’t too bad.
The total interest you would pay by refinancing into a 15-year mortgage at 2.10% would be more than $33,000, while you should fork over $95,000 interest for the 30-year bond at 2.77%. That’s an extra $62,000.
Remember, in addition to saving over $62,000, you would be paying off your debt in half the time.
Why shorter mortgage terms have better rates?
The average interest rate on a 15-year mortgage is typically lower than the average for a 30-year loan because shorter-term loans are generally considered less risky by lenders.
However, because a 15-year mortgage requires a higher monthly payment, the eligibility criteria for a mortgage are often stricter than for a 30-year loan.
You might eventually decide that the bar is set too high and that you need to look for other ways to lower your housing costs — perhaps by snooping around looking for a lower rate on your home contents insurance.
Getting a 15-year mortgage may require increasing your income above what you currently earn, lowering your debt-to-income ratio, or raising your credit score with 200 points or more.
How do you find the best mortgage rate for 15 years?
To make sure you’re getting the best possible rate for a 15-year refi, check your credit score before looking for deals.
You need a score in the “very good” (740 to 799) or “excellent” (800+) range if you want lenders to feel confident working with you.
If you haven’t been keeping your score lately, no problem – you can easily check your score for free online, and get tips on how to boost it when it’s low.
Once your credit score is in good shape, you’ll want to shop around and compare quotes from at least five lenders to find the best loan offer for 15 years.
Research by Freddie Mac has found that comparing five rates can save a borrower thousands of dollars over the life of a loan — so don’t jump straight to the first offer you get.
This article provides information only and should not be construed as advice. It comes without any kind of warranty.