The average cost of a 15-year fixed-rate mortgage fell again this week, hitting a new record low of 2.49 percent, according to Bankrate’s weekly rate survey. That’s down 4 basis points from 2.53 percent, the previous record, where it’s been for the last two weeks.
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 3.05 percent.
30-year mortgages are the most common loans for homeowners, but there are some definite benefits to the 15-year option. Those 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 15-year mortgage holders realize big savings compared with 30-year mortgages of the same principal.
It’s not all upside though. Because 15-year mortgages are paid off in half the time as their 30-year counterparts, the monthly payments are higher, despite lower interest rates. That can be a squeeze on your finances if your mortgage accounts for too much of your monthly cash outlay.
Nevertheless, 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 3.05 percent would be about $158,000. But, with a 15-year mortgage at 2.49 percent, you’ll only pay about $60,000 in interest over the life of the loan. So, you’d save almost $100,000 overall by taking the shorter loan period and lower interest rates, if you can afford the extra monthly cost.
“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,” Rocke Andrews, president of the National Association of Mortgage Brokers previously told Bankrate.
For most borrowers, it will be 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.