In the days before the pandemic, 15-year mortgages — with their usually stiff monthly payments — were far too expensive for many people refinancing their homes. Borrowers often just grabbed another 30-year home loan, America’s go-to mortgage.
But with the COVID crisis keeping mortgage rates in the cellar, even the 15-year option has been looking cheap. That’s especially true right now, with 15-year rates at an all-time low in the latest survey from mortgage giant Freddie Mac.
More borrowers have been choosing the shorter-term loans: In May, 15-year mortgages accounted for 15.8% of all home loan originations, up from just 5.5% in May 2019, according to the latest data from the Urban Institute.
Here’s how to evaluate if a 15-year fixed-rate mortgage is right for you — and how to land one of today’s all-time-low 15-year rates.
Today’s 15-year mortgages offer big savings
Average rates on 30-year fixed-rate mortgages are deep below 3% at the moment, reflecting worries among investors that the COVID-19 delta variant could torpedo the economy’s comeback from the pandemic.
Thirty-year rates this week are averaging 2.77%, not far from early January’s typical rate of 2.65%, which was the lowest in the 50-year history of Freddie Mac’s weekly survey.
But rates on 15-year fixed-rate loans are even cheaper and, in fact, are currently at a record low: averaging a mere 2.10%.
Let’s be clear: Because of their shorter repayment period, 15-year mortgages will give you a much higher monthly payment than a 30-year loan. But with 15-year rates at all-time lows, payments also will be as low as can be.
Here’s an example of how you can save with a 15-year mortgage right now: In early August 2019, when the average for a 15-year fixed-rate mortgage was 3.20%, a $250,000 loan would have cost you $1,751 per month, or $21,012 a year.
But at the current average rate of 2.10%, that same loan will cost you $1,620 per month, or $19,440 a year — for annual savings of close to $1,600.
15-year mortgage vs. 30-year loan
Even better, the shorter-term mortgage will cost you tens of thousands of dollars less in total interest versus a 30-year loan.
If you were to refinance a $200,000 balance at the current average rates, your monthly payment would be $1,296 with a 15-year loan, but only $819 with a 30-year mortgage — a $477 difference.
That might be a deal breaker for some, but when you consider the lifetime interest you’d save with the shorter loan term, the high monthly payment isn’t quite so bad.
The total interest you’d pay by refinancing into a 15-year mortgage at 2.10% would be more than $33,000, while you’d have to fork over about $95,000 in interest for the 30-year loan at 2.77%. That’s an extra $62,000.
Don’t forget that in addition to saving more than $62,000, you’d pay off your debt in half the time.
Why shorter mortgage terms have better rates
The average interest rate on a 15-year fixed-rate mortgage is usually lower than the average on a 30-year loan because shorter-term loans are generally seen as less risky by lenders.
However, since a 15-year mortgage requires a steeper monthly payment, the criteria needed to qualify for one is often stricter than for a 30-year loan.
You might ultimately decide the bar is too high and that you’ll have to look for other ways to cut your housing costs — maybe by shopping around to find a lower rate on your homeowners insurance.
To land a 15-year mortgage, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or pump up your credit score by 200 points or more.
How to find the best 15-year mortgage rate
To ensure you’ll get the best rate possible on a 15-year refi, you’ll want to check your credit score before you start looking for offers.
You’ll need a score in the “very good” (740 to 799) or “excellent” (800+) range if you want lenders to feel confident about working with you.
If you haven’t been keeping tabs on your score lately, that’s OK — you can easily check your score for free online, and get tips on how to boost it if it’s low.
Once your credit score is in good shape, you’ll want to shop around and compare quotes from at least five lenders to find the best 15-year loan offer.
Research from Freddie Mac has found that comparing five rates can save a borrower thousands of dollars over the life of a loan — so don’t jump at the first offer you get.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
