Today's Fifteen Year Mortgage Rates
15 vs 30 Year Loans
The most popular mortgage product across the United States is the 30-year fixed-rate mortgage. The reason most buyers opt for a 30-year fixed rate is they are guaranteed a stable monthly payment and the longer loan duration means they do not have a high monthly payment.
Buyers who have a high income or live in areas with low home prices may prefer to pay off their home much more quickly. In 2016 the 15-year fixed-rate mortgage was the second most popular option after the 30-year. Borrowers save money two different ways by choosing a 15-year over a 30-year loan.
- The shorter loan duration typically comes with a interest rate that is about 0.25% to 0.5% lower than the 30-year option.
- Since the loan will be paid off quicker the loan has less time to accrue interest charges.
Fixed or Adjustable?
When interest rates are relatively low most consumers opt for the certainty of fixed-rate mortgages (FRMs). When interest rates are relatively high people are more inclined to opt for adjustable-rate mortgages which have a lower introductory rate.
Adjustable-rate mortgages (ARMs) offer an initial teaser rate which lasts for the first 3, 5 or 7 years & then resets annually based on broader financial market reference rate like the London Interbank Offered Rate (LIBOR) or the 11th district Cost of Funds Index (COFI).
Most homeowners across the United States tend to either move or refinance their home about once every 5 to 7 years. Those who are likely to move in a short period of time may want to opt for the lower adjustable-rate, whereas those who are certain of their job stability and want to settle down for life may want to lock in low loan rates on their home.
No matter which choice a homeowner makes, provided they keep up with payments & have a strong credit profile they can choose to refinance their loan at a later date if interest rates fall significantly.
Comparison to Other Options
While the 15 year is one of the more popular mortgages, there are several other products which are available. A 15 year can be compared to the following:
- 30 year mortgage – The 30 year is the most frequently used option. Like the 15 year, the 30 year has a fixed payment over the life of the loan. The main difference is that the 30 year is paid over a period twice as long, which leads to lower monthly payments. However, the 30 year always comes with a higher interest rate which ranges from 0.50% to 0.75% higher than a 15 year.
- Adjustable Rate Mortgage (ARM) – Another common product is an ARM. 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 each year to a different rate, which can be unaffordable for some people if credit market conditions tighten significantly. 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's interest rate. Most ARM loans have a maximum loan cap stated on them, though this cap is typically significantly higher than the rate charged for a conforming 15-year or 30-year fixed-rate mortgage.
- Jumbo Mortgage – A jumbo mortgage is designed to finance more expensive homes. Jumbos are required for loan balances exceeding $424,100. Since jumbos provide more risk to the bank, they often come with higher interest rates. 15-year jumbos typically come with an interest rate of 0.5% to 1% above a traditional 15 year loan.
What Affects Interest Rates
Like all mortgage products, the best time to get a 15-year is when interest rates and fees are low. Interest rates are affected by a few different factors. The main factors which affects rates are inflation expectations, asset valuations, benchmark rates set by the Federal Resever & international capital flows.
Supply and demand is a basic economic principle which affects almost all everything in a free market economy. In a good economy which is growing quickly, interest rates tend to be higher because more people can afford to purchase a home and the demand increases. In a poor economy, rates tend to be lower because less people are looking to purchase a home which leads to a lower overall demand.
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 giants would keep their interest rates low. The Federal Reserve purchased over a trillion dollars worth of mortgage-backed securities (MBS) throughout the duration of their quantitative easing program. Between their purchases of government bonds & MBS they both drove down core interest rates across the economy and the spread between governmental debt and other forms of debt.
In situations when the economy is growing quickly, the Federal Reserve is forced to increase interest rates to prevent high inflation. Increasing federal rates has an indirectly impact which will increase mortgage costs. Home loans are typically priced at a rate slighly above 10 year Treasury notes, as most people tend to sell or refince every 5 to 7 years.
Benefits of a 15 Year
There are many benefits of selecting a 15 year loan. Some of the main benefits are:
- Low Interest Rate – As mentioned earlier, a 15 year normally comes with an interest rate of .50% to .75% lower than a 30 year rate. Coupled with the fact that the loan is paid off much quicker, a 15 year will save a borrower thousands of dollars each year in interest payments. Over the course of a $200,000 loan, a borrower could save a substantial sum of money. On the day this article was published, they would have saved $147,000 in interest expenses by selecting a 15 year over a 30 year.
- Build Equity Quickly – Another benefit of selecting a 15 year is that a homeowner will build home equity much quicker than someone who selects a 30 year. Assuming a $200,000 loan with interest rates of 6% for a 30 year and 5.25% for a 15 year, after just five years a borrower with a 15 year will have $35,000 more equity in their home than a person with a 30-year. After the 15 years, a person with a 30 year will still have $144,000 pinciple balance left.
- Fixed Payment – Another benefit of a selecting a 15 year 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.
While a 15 year comes with many advantages and is ultimately a very cheap options, some lenders attempt to throw in hidden costs which could cost a borrower thousands of dollars. Closing costs are common for any loan, but some costs to look out for & consider are as follows:
- Points – A hidden cost that many lenders attempt to lump into a 15 year is mortgage points. Lenders often offer borrowers very low interest rates, but to make the loan more profitable they try to add in points which are either paid at closing or lumped into the monthly payment. Points normally cost about 1% of the loan balance, but can save up to .125% off the interest rate. Buying points can make sense, but you have to run the numbers & consider how long you plan on living in the house before moving. If you buy a lower rate for 15-years with a big upfront expense but plan to move after 3 years the numbers won't work in your favor.
- Property Mortgage Insurance – PMI is an insurance policy which protects the lender in case of default. Home buyers who put less than 20% down on their home are typically required to pay PMI until the loan to value (LTV) falls below 80%.
- 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 home 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 loan balance. A pre-payment penalty can be disadvantageous if the borrower wants to refinance their mortgage or if they sell their home. Some home owners pay off 99% of their home & then wait out the expiration of the pre-payment penalty before paying off their small remaining balance.
A Popular Choice Among Homeowners
The 30-year FRM is the most popular choice among home buyers
The overall market composition changes significantly when one includes refis, as many people choosing to refinance their home loans into a lower rate choose the 15-year FRM. The below chart includes home purchases & home refinances. A similar chart which would focus on refinancing only would show nearly double the share for 15-year FRMs.