Rates are super low - Consider a 15-year mortgage

Consider the benefits of a 15 year mortgage. 

Mortgage rates just keep heading lower, defying expectations. That’s nearly a half a percentage point lower than the rate just a year ago, according to Freddie Mac.

Meanwhile, home values have been heading higher. The S&P/Case-Shiller home price index of 20 major metro areas has gained 5 percent over the past year and is up 26 percent since late 2012.

Consider this. Let's say you took out a $250,000, 30-year mortgage at a 5 percent interest rate 10 years ago. Your monthly payment would be about $1,350. Now let's say you refinance that mortgage now into a 15-year loan at the recent average rate of 2.81 percent (for 15-year loans). Your monthly payment would rise to about  $1,425—an increase that could be palatable for you.

For the extra $75 per month, you’d save about $80,000 more in total interest costs than if you had chosen to refinance into a 30-year loan.

The combination means refinancing is now a very good option for more homeowners, especially those that have at least 20 percent equity in their homes.

With rates so low, it's also a good time to consider refinancing into a 15-year mortgage instead of a 30-year mortgage.

Typically, homeowners prefer 30-year mortgages. Halving the payback period often means making a much higher monthly payment. But with today’s super low rates, it makes a 15-year mortgage less of a financial stretch.

A 15-year loan only makes sense if you have the extra cash flow to comfortably afford the higher monthly payment. We have a free online refinancing calculator to help you run the numbers.

Qualifying for a 15-Year Mortgage

If refinancing interests you, check to see if you have at least 20 percent equity and an above average FICO score. FICO scores range from 300-850. According to mortgage data firm Ellie Mae, the average FICO credit score for borrowers who refinanced for a conventional mortgage recently was 732.

Ellie Mae also reported that borrowers whose refinancing applications were approved, typically had a mortgage payment that was 25 percent or less of their income. Their total debt payments (including the mortgage) added up no more than 38 percent of their income on average.

Keep in mind that taking out a new mortgage will come with closing costs. You can choose to pay upfront, or accept a slightly higher interest rate if you don’t want to use cash to cover your closing costs. The good news is that comparison-shopping from different lenders is now easier. Beginning last fall all lenders must give potential borrowers a standard Loan Estimate that itemizes all loan fees. 

Pay Your Loan Back Faster

If you have 15 years or less remaining on your existing mortgage you may not want to refinance, it makes sense to check out your options... you don’t want to start paying more interest now.

A better move would be to accelerate the payback on your existing mortgage. Let's say you have a monthly mortgage of $1,265. You're paying back a loan of $250,000 that charges a 4.5 percent interest rate. If you added $200 a month to your monthly payment, you could reduce the payback on a 15-year mortgage to around 12.5 years. This would also save you nearly $13,000 in interest costs. If you added $300 a month you could shorten the payback time frame to about 11 years and save more than $16,000 in interest.

We would be happy to calculate the numbers for you to see if it makes sense to refinance.

Call us!