Once again the interest rates on conventional mortgages have gone down. Freddie Mac reports conventional 30 year mortgage rates down to 3.89% across the country in their recent weekly survey of mortgage rates. The same survey reports 15 year conventional mortgage rates at an even greater low of 3.10%.
These are the lowest mortgage rates in 18 months. Low interest rates on mortgages give home buyers more purchasing power, and also allow existing home owners to cash in on the equity of their homes with refinancing options not previously open to them. For people looking to buy or refinance, the best deal is the 15 year mortgage. Not only does the low interest rate make a 15 year mortgage the best investment, it also means that the payments will be easier to handle. The gulf between the 30 year and the 15 year mortgage interest is 79 basis points. That equates to a .79% difference, and can mean savings of as much as 64% over the entire life of the mortgage.
THE LOW INTEREST RATES ON A 15-YEAR MORTGAGE PRODUCES AN EXCELLENT SAVINGS OPPORTUNITY FOR HOME OWNERS
Home owners who buy a home or refinance an existing mortgage using a 15 year conventional mortgage save a great deal of money compared to those who use 20 or 30 year mortgages. While this is always true, the new low interest rates on these mortgages, and the almost 1% difference between a 15 year mortgage and a 30 year mortgage mean an extremely lucrative savings advantage for the 15 year mortgage holder.
The lower interest rate on a 15 year mortgage isn’t a new concept. Lenders have almost always given lower rates on shorter term mortgages. This means saving money, because home owners end up paying far less interest over the term of the loan. The second reason a 15 yaer mortgage saves money for home owners is there is less loan time to pay on. Even if interest rates were the same on a 15 year and a 30 year loan, home owners with only a 15 year term pay interest on half of the amount of time as a 30 year mortgage holder.
It would seem that saving 50% on a 15 year mortgage compared to a 30 year mortgage would be the expected, but savings are actually greater thanks to the lower interest rate on a 15 year mortgage. For instance, a home buyer with an average $268,500 loan will pay $119,000 less with a 15 year loan than a 30 year loan. That is a total savings of 64% over the entire life if the loan.
While monthly payments can be higher on a 15 year loan than a 30 year loan, the interest rate savings help keep them manageable. The savings in the long run make a little extra payment easier to swallow as well. It is real money that can be used for many purposes such as kid’s college educations, retirement savings or even a business investment.
Home buyers have even found that saving on a 15 year mortgage enables them to buy a vacation home or second home.
15 YEAR CONVENTIONAL MORTGAGE GAINING IN POPULARITY WITH HOMEOWNERS
The new low interest rates on 15 year conventional mortgages are attracting more and more home owners to choose them over a 30 year loan.
Recent studies by the government show that 30% of all people looking to refinance or purchase a home are choosing 15 year loans over the 30 year fixed rate mortgages. This trend is continuing over a third straight quarter, an increase of 5 times as many home owners choosing this type of loan from the beginning of 2009.
One of the main reasons the 15 year mortgages are so popular now is the continued fall in mortgage interest rates. The interest on a conventional 15 year home loan is 3.10% for those home owners opting to make a 0.5 point payment at closing. By paying 0.5% of the total home loan size, buyers can decrease their interest payments and make homes more affordable.
Discount points are a fairly affordable way for buyers to manage their interest payments. For instance, a home buyer with an average home purchase price of $625,500 would have to pay $3,128 at closing to make the 0.5% discount point payment. Since the national average home cost is well below that, at roughly $250,000 discount points can be very affordable.
Home buyers and home owners wishing to refinance who qualify for VA or FHA loans can save even more. The mortgage interest on VA and FHA loans are lower than standard conventional mortgage rates.
Ellie Mae produced studies showing recent 30 year mortgage rates for FHA loans averaged 25 basis points lower than standard conventional bank loans. VA loans were even lower at 37.5 basis points (0.375%) lower. Many lenders have even begun quoting rates and APR in the 2% range on 15 year standard mortgages without any discount point purchases.
REASONS FOR CHOOSING A 15 YEAR MORTGAGE
15 year home loans provide home buyers a great savings advantage over the standard 30 year mortgage. Along with saving money on the amount of interest owed over the total length of the loan, the lower interest rate of a 15 year mortgage compared to a 30 year mortgage also creates a great savings advantage for home buyers and home owners refinancing loans.
However, before a home buyer considers the possible savings of a 15 year mortgage it is important to be sure they can afford the higher payments. Lower interest payments are making these shorter term loans more affordable, but they still may be a budget killer for some home buyers.
An average home loan of $268,500 will cost a home buyer $602 a month more than it would be on a 30 year conventional loan. If that will cause hardships or an inability to meet standard financial obligations then a 15 year mortgage may not be right for you. Home owners who want to take advantage of the better interest rates but cannot afford a 15 year mortgage may be able to refinance to a new 30 year loan and still get great savings due to the drop in mortgage rates while keeping payments manageable. Home owners should remember that even if they choose the 30 year mortgage in order to keep payments low, they can still opt to send additional money each month to reduce the principle on the loan. This will shorten the overall length of the loan and increase the savings to them.