Today's Fifteen Year Mortgage Rates
When looking to purchase a home, many people choose a 15 year mortgage over other mortgage products. Since the loan will be paid down more quickly than other mortgage products, it is often preferred by mortgage lenders. Because of this, a 15 year mortgage comes with a fixed payment and lower interest rates than other mortgage products.
Comparison to Other Mortgage Products
While a 15 year mortgage is one of the more popular mortgage products, there are several other mortgage products which are available. A 15 year mortgage can be compared to the following mortgage products:
- 30 year mortgage – The 30 year mortgage is the most frequently accepted mortgage product. Like the 15 year mortgage, the 30 year mortgage has a fixed payment over the life of the mortgage. The main difference is that the 30 year mortgage is paid over a period twice as long, which leads to lower monthly mortgage payments. However, the 30 year mortgage always comes with a much higher interest rate which ranges from 0.50% to 0.75% higher than a 15 year mortgage.
- Adjustable Rate Mortgage (ARM) – Another common mortgage product is an adjustable rate mortgage. With an ARM a borrower receives a low initial interest rate and fixed payment for a set period of time, which normally ranges from 1 to 7 years. After the initial period, the interest rate adjusts to a different rate, which can be unaffordable for some people. Depending on the length of the initial interest rate period, an ARM will come with an interest rate of 0.25% to 0.50% below a 15 year mortgage interest rate.
- Jumbo Mortgage – A jumbo mortgage is a mortgage that is designed to finance more expensive homes. A jumbo mortgage is required for any mortgage balance that exceeds $417,000, although it was raised to $729,000 temporarily. Since jumbo mortgages provide more risk to the bank, they often come with higher interest rates. A 15 year jumbo mortgage will come with an interest rate of 1% above a traditional 15 year mortgage.
What Affects Mortgage Rates
Like all mortgage products, the best time to get a 15 year mortgage is when interest rates and fees are low. Interest rates are affected by a few different factors. The main factor which affects mortgage interest rates is supply and demand. Supply and demand is a basic economic principle which affects almost all everything in a free market economy. In a good economy, interest rates tend to be higher because more people can afford to purchase a home and the demand for mortgages increases. In a poor economy, mortgage rates tend to be lower because less people are looking to purchase a home which leads to a lower overall demand for mortgage.
Mortgage rates can also be affected by governmental actions. In the past, the federal government has invested heavily in Freddie Mac and Fannie Mae so the two mortgage giants would keep their interest rates low. Also, in situations when an economy is improving, the federal government is forced to increase federal interest rates to prevent drastic inflation. Increasing federal rates has an indirectly will increase mortgage rates.
Benefits of a 15 Year Mortgage
There are many benefits of selecting a 15 year mortgage over other mortgage products available. Some of the main benefits of a 15 year mortgage are as follows:
- Low Interest Rate – As mentioned earlier, a 15 year mortgage normally comes with an interest rate of .50% to .75% lower than a 30 year mortgage rate. Coupled with the fact that the loan is paid off much quicker, a 15 year mortgage will save a borrower thousands of dollars each year in interest payments. Over the course of a $200,000 loan, a borrower will save $147,000 by selecting a 15 year mortgage over a 30 year mortgage.
- Build Equity Quickly – Another benefit of selecting a 15 year mortgage is that a homeowner will build home equity much quicker than someone who selects a 30 year mortgage. Assuming a $200,000 mortgage with interest rates of 6% for a 30 year mortgage and 5.25% for a 15 year mortgage, after just five years a borrower with a 15 year mortgage will have $35,000 more equity in their home than a person with a 30-year mortgage. After the 15 years, a person with a 30 year mortgage will still have $144,000 left on their mortgage.
- Fixed Payment – Another benefit of a selecting a 15 year mortgage is that the borrower will have a fixed payment for the life of the term. Because of this, a borrower will be assured that their payment will never adjust dramatically and they will always have an affordable payment.
Hidden Costs of a 15 Year Mortgage
While a 15 year mortgage comes with many advantages and is ultimately a very cheap mortgage, many lenders attempt to throw in hidden costs which could cost a borrower thousands of dollars. Some hidden costs to look out for are as follows:
- Points – A hidden cost that many lenders attempt to lump into a 15 year mortgage is mortgage points. Lenders often offer borrowers very low interest rates, but to make the loan more profitable they try to add in mortgage points which are either paid at closing or lumped into the mortgage payment. The mortgage points normally cost about 1% of the mortgage balance, but can save up to .125% off the interest rate.
- Balloon Payments – A balloon payment is a hidden cost that some lenders attempt to throw into their mortgage agreements. In these agreements, a lender will require a borrower to payoff the entire outstanding mortgage balance at a certain point in time. If the mortgage can’t be repaid or refinanced, the lender may throw the loan into default and foreclose on the home.
- Pre Payment Penalties – Another hidden cost, which is rather rare, is pre-payment penalties. A pre-payment penalty is a penalty that prevents a borrower from paying off their mortgage before a certain date. Many pre-payment penalties phase out after 3 to 5 years, but can still cost as much as 2% of the mortgage balance. A pre-payment penalty can be disadvantageous if the borrower wants to refinance their mortgage or if they sell their home.