The average cost of a 15-year fixed-rate mortgage continued to tumble this week, hitting a new record low of 2.53 percent, according to Bankrate’s weekly rate survey. That’s down two basis points from 2.55 percent last week.
With the U.S. economy in recession because of the coronavirus pandemic, mortgage rates have plunged to record lows across loan periods, and have stayed down throughout the summer. The 30-year benchmark mortgage rate also reached a new low this week in Bankrate’s analysis, at 3.09 percent.
Most people think of 30-year fixed rate loans when they’re talking about mortgages, but if you can afford the extra monthly costs, there are some major benefits to shortening your loan term.
15-year mortgages usually have lower interest rates, and because they’re paid off over a shorter period of time, they accrue less interest overall than longer 30-year mortgages. That means that, although they cost more on a per-month basis over the life of the loan, 15-year mortgage holders realize big savings compared with 30-year mortgages of the same principal.
So, if you’re looking to get a new mortgage or are thinking about refinancing, it’s worth giving 15-year loans a close look.
For example, if you secured a $300,000 mortgage today at the average interest rates, your total interest payment on a 30-year mortgage at 3.09 percent would be about $160,000. But, with a 15-year mortgage at 2.53 percent, you’ll only pay about $60,000 in interest over the life of the loan. So, you’d save about $100,000 overall by taking the shorter loan period and lower interest rates, if you can afford it.
“A 15-year mortgage will build equity faster and save significant amounts of interest over the life of the mortgage. Even selling early will provide you with more equity/down payment the new home,” said Rocke Andrews, president of the National Association of Mortgage Brokers.
Keep in mind that although the interest rate and total amount of interest paid on 15-year fixed-rate mortgages is less, the monthly payments are more, so they can be more of a squeeze on your monthly budget.
Depending on your financial situation, it’s easier to qualify for a bigger loan with a 30-year mortgage because the monthly payments are lower. A lender won’t back a loan that you can’t afford, so even if the total amount is the same, the difference in monthly payments can change what’s financially feasible for some borrowers.
If you want to save a lot on interest, consider opting for the 15-year mortgage on a less-expensive house so the monthly payments can fit your budget. It’s a great way to build more wealth faster.