If you’re looking to buy a home or considering refinancing don’t overlook 15 year mortgage rates. Most homeowners in the United States choose 30-year term lengths without thinking twice. There are many advantages to 15 year mortgage rates including dramatic savings over the lifetime of the loan. Here are the pros and cons of choosing 15 year mortgage rates for your next home loan.
Choosing 15 year mortgage rates offers dramatic savings over 30-year term lengths.
Most American homeowners choose 30 year mortgage loans without thinking twice. Here’s why you should reconsider that decision for your next home loan.
15 Year Mortgage Rates Offer Dramatic Savings
The most obvious advantage of choosing 15 year mortgage rates is that they are lower than 30-year fixed AND 30-year Adjustable Rate Mortgages. While your monthly payment will be slightly higher because you’re choosing a shorter term length, the amount of cash you’ll be stuffing in your lender’s pockets is dramatically less over the lifetime of your mortgage.
The downside of 15 year mortgage rates is that your payment amount can seem higher, especially if you’re used to paying on a 30-year home loan. For every $100,000 that you borrow based on today’s purchase and mortgage refinance rates, $700 is applied to paying down your principal balance. If you choose a 30-year fixed rate mortgage only $470 of your payment is going towards your balance, you’re stuffing the rest in your lenders pocket.
The aggressive repayment schedule that comes with 15 year mortgage rates means you’re saving nearly $45,000 per $100,000 that you borrow over the lifetime of the home loan.
The math works out to a whopping 48% difference in the amount of your monthly payment going to pay down the balance vs. paying interest in favor of 15 year mortgage rates. Check out the amortization schedule on your 30-year home loan and you’ll find in the early years most of your payment goes to pay the interest.
Slightly Higher Mortgage Payments
Because your home loan is amortized over 15 years instead of 30 years, choosing 15 year mortgage rates means your monthly payments will be higher. Here’s an example to illustrate a typical mortgage refinancing transaction:
- Loan Amount: $250,000
- 15 Year Mortgage Rates: 3.375%
- 30 Year Mortgage Rates: 4%
The monthly payment with a 15-year term length works out to $1,771.90. Choosing the 30 year term length at 4% gets you payments of only $1,193.54. Even though the interest rate is higher, spreading the payments out over 30 years gets you lower payments. This seems like a good idea until you compare loan amortization between the two.
Remember, in today’s market choosing 15 year mortgage rates will save you $45,000 per $100,000 borrowed. That’s dramatic savings.
Beware Unnecessary Discount Points & Fees
When researching purchase and mortgage refinance rates I’ve seen quotes that included as many as two discount points. If you’re not already familiar with points, this is a fee you pay to buy down your interest rate. One point is one percent of your home loan and gets you a discount of .25% per point. Should you pay discount points?
Purchase and mortgage refinancing rates are already near sixty year lows and paying discount points unnecessarily only drives up your closing costs making it more difficult to break even recouping your out-of-pocket expenses. You recoup these expenses from the savings you’re getting by lowering your payment amount and/or term-length. If you sell your home or refinance again before breaking even you will lose money regardless of low refinance rates.
You can reduce the amount of time it takes to break even by paying less at closing. Avoiding unnecessary discount points and paying less for the loan origination fee not only saves you thousands of dollars but allows you to reach that break-even point much more quickly.
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You can learn more about paying less at closing when mortgage refinancing by checking out my free Underground Mortgage Videos.
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