The best way to finance a 15-year mortgage in America | RNL Blog

Like numerous American homeowners, Krueger refinanced his mortgage last year. The move lowered her interest rate by nearly a full percentage, slashed $268 in monthly interest costs, and allowed her to pay off her home in more than a decade.





Choosing a Kroger is a choice that more and more homeowners have made in recent months, especially when refinancing. In fact, according to the Policy Research Organization

The Urban Institute, 15-year loans accounted for nearly 17% of all loan assets in October 2020. That's only 10% higher than the previous year.



15-year mortgage rates today

The increase in their popularity is largely due to the very low-interest rates that short-term loans are currently offering.

The average rate for a 15-year loan is just 2.21%, 0.56 percentage points lower than the rate for a 30-year loan, according to the latest data from mortgage buyer Freddie Mac. For a $200,000 mortgage, that would mean a saving of approximately $60,000 over the life of the loan.

“Because of the pandemic, mortgage rates have fallen to the lowest levels in US history, but 15-year mortgage rates have become incredibly attractive,” said Matt Weaver, vice president of CrossCountry Mortgage in Boca Raton, Florida.



Savings and costs for a 15-year mortgage

The biggest advantage of choosing a 15-year loan is the lower interest costs.

There are two reasons for this: First, you pay interest for fewer years. Also, 15-year loans have always offered lower rates than long-term mortgages. The average 15-year interest rate was 3.39% in 2019 and 2.61% in 2020, according to Freddie Mac. On the other hand, the 30-year term loans amounted to 3.94% and 3.11%, respectively.

Why are short-term interest rates so low? According to Glenn Broker, president of the mortgage lender Ally Home, "Lenders view these short-term loans as less risky investments." And in the mortgage world, the lower the lender's risk, the better the interest rate.

Low-interest rates are not the only advantage of 15-year loans. Short-term loans also allow homeowners to get out of mortgage debt faster. This could mean early retirement, more solid savings, or an investment strategy for later.

 "Many Americans are forced to continue to thrive in their later years because of the need to make mortgage payments," said Eli Sklar, senior loan advisor at LoanDepot.

These loans are not without fault, of course. On the same $200,000 loan referenced earlier, a 15-year maturity will come with monthly payments of $1,306.

 30 years? That would be just $818—a difference of about $500.

From mortgage technology provider Digital Risk. “This eats up disposable income.”

There is also the issue of eligibility for a 15-year loan. Because of the higher stakes — not to mention the higher monthly payments they receive — lenders tend to be tougher on 15-year borrowers.

According to Brunker's program, borrowers will need to meet "more stringent financial criteria" than they would for a 30-year loan. This could mean more income needs, a lower debt-to-income ratio, or a higher credit score.

Data from ICE Mortgage Technology shows that 15-year borrowers tend to have credit scores about 20 percentage points higher than 30-year borrowers.



15-year mortgage refinance

In general, 15-year loans become more popular with refinancers than consumers. In most cases, homeowners will have already paid off a large portion of their mortgage. This lower balance means it is more manageable

Payments - especially if the interest rate on the new loan is lower than the current rate.

Refinancing is also familiar with mortgage payments. If they stay in the house long enough, inflation or an increase in income can make their old payments manageable. What about these exorbitant costs? to her

It's probably not as scary as it is for a buyer—especially when a first-time buyer jumps from a small monthly rent to a much larger mortgage bill.



What is your starting point?

This does not exclude buyers from choosing a 15-year loan, though. Furthermore, it does not imply that each and every refinances agent must obtain a short-term loan.

The monthly payments are the first thing you should consider if you want to take out a 15-year loan. Is it feasible in light of your income, spending plan, and other costs? Be sure to include additional expenses.

Your monthly mortgage payment frequently includes extras like real estate taxes, homeowner's insurance payments, and mortgage insurance. These also consume cash flow.

Being at ease with repayment is really what matters when choosing between the ages of 15 and 30, according to Melissa Cohn, an executive mortgage banker at William Raveis Mortgage.

You should consider the interest rate when making your choice. Based on current mortgage rates, use the mortgage calculator to determine the total interest costs for a 15-year loan and a 30-year loan. Making the best choice for your finances might be aided by knowing how much each mortgage will cost you over time.

Finally, if you're refinancing your loan, you should also consider your break-even point or the point at which you save more than you spend on the reference. Considering the interest savings of $268 per month, you'll equalize in less than five months.

To determine your break-even point, start with your closing costs and work backward (refinancing closing costs are usually around 2% to 5% of the loan amount if you don't have an exact number to work with). Divide these costs by the monthly interest savings. It's probably a safe bet going forward if you plan to be indoors for extended periods of time.

Remember: You'll usually get a 15-year loan faster than a 30-year loan, just because of the extra interest savings. This is another reason why a short-term loan is a wise choice.



Other options for quick mortgage payments

If you're hoping to pay off your loan faster or save on interest, a 15-year loan isn't your only option. Many professionals say there's another option: making extra payments on a 30-year loan instead.

Depending on your budget, "paying extra" can mean many things: adding more to each monthly payment, making an extra payment each year, or even just getting a windfall on the loan—things like tax returns and vacation bonuses, for example.

Another option—at least for those who refinance—is to refinance another 30-year loan, taking advantage of lower interest rates while still making the same high payments as before. Since you are already comfortable paying, you will not put any additional stress on your finances.
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