Home buyers can benefit in several ways by choosing a 15 year mortgage instead of a 30 year product. The benefits of a lower mortgage rates from 15 year home loans can make the higher monthly payments worthwhile.
Lower Mortgage Rate
Mortgage lenders offer lower mortgage rates on 15-year mortgages than for 30 year mortgage loans. According to Freddie Mac’s Primary Mortgage Market Survey (PMMS), the difference between average 30 year mortgage rates and 15 year mortgage rates typically runs slightly less than one percent lower for a 15 year mortgage. While lower mortgage rates are welcome news, the real savings on a 15 year home loan occurs over the shorter repayment.
Please note that this example is for illustrative purposes only.
Lower Mortgage Insurance Premiums
If you borrow more than 80 percent of a home’s appraised value, mortgage insurance is generally required. As with mortgage lenders, a shorter-term mortgage loan poses less risk to private mortgage insurers and coverage for a 15 year home loan costs less than it does for a 30-year loan. Actual costs vary among mortgage insurers.
It’s also possible to obtain a 15 year home loan through FHA-approved lenders. FHA also offers lower mortgage insurance premiums for 15 year loans than for 30 year loans.
Rates Are Fixed
15 year fixed mortgages are fully amortized with unchanging principal and interest (P and I) payments. They’re offered by FHA lenders, VA lenders, and non-government (conventional) lenders. Conventional loans come in conforming (Fannie Mae and Freddie Mac) loan amounts and higher non-conforming or jumbo loan amounts. These loans’ fixed rates make budgeting easier for homeowners.
15 year home loans can help consumers achieve financial and lifestyle goals. Paying off a mortgage faster can help borrowers retire early, erase consumer debt or invest in a vacation home. While the terms of a 30 year home loan may permit paying off the mortgage early without penalty, it can be difficult to follow through with extra payments to reduce the loan’s principal. A 15 year mortgage assures borrowers of the savings associated with lower mortgage rates and a shorter loan term.
Mortgage borrowers should discuss their financial situations and goals with a financial advisor to determine how a 15 year home loan fits in with those objectives.
Those looking for a 15 year mortgage can increase their savings even more by obtaining mortgage quotes from several competing lenders and selecting the most competitive offer.