Many people tend to think of mortgages in terms of 30 years. Even the adjustable rate mortgage (ARM) products tend to coincide with the 30 year terms. Many people feel that this a more suitable option as it allows them to pay a smaller amount of money per month while capitalizing on a bigger mortgage interest deduction at the end of the year. However with the 15 year rates at near historically low levels according to the website Monitor Bank Rates, now may be the time to consider taking an aggressive approach to home ownership and locking in a 15 year loan.
15 Year Fixed Loan Interest Rates
One of the major advantages to 15 year loans, are the interest rates. These are typically below the 30 year fixed mortgage rate. The lower interest rate rewards the borrower for taking on a more aggressive payment schedule by offering less interest over the life of the loan.
Higher Payments Associated with 15 Year Mortgage Rates
Because the entire principal balance of the loan must be paid off in 15 years, the amount that the borrower will pay each month is will be greater. However more of that monthly payment is going toward principal than it would with a 30 year loan.
As an example, say the “Williams Family” were to take out a mortgage of $300,000 at 5 percent. The monthly payments would be just under $2400 per month. That same payment at the very same interest rate would be just over $1600 per month. This demonstrates how paying 33 percent more money, cuts the mortgage by 50 percent of the time.
Total Interest for 15 Year Fixed Rate Mortgage
The interest paid over the life of the loan is also significantly less. In the above example the “Williams Family” would pay $127,000 in interest over the life of a 15 year mortgage or $279,000 interest for a 30 year fixed rate mortgage at the same rate. It should be noted, however, that this will mean a smaller tax deduction each year for a shorter amount of time for the “Williams Family.”
Reading the Real Estate Market
There can be significant advantages to having a 15 year fixed mortgage in a down real estate environment. By paying down the principal debt at a quicker pace, the owner of the home is insulating themselves from owing more at the time of a resale. Essentially the faster the principal is paid down, the better chance the owner has to either cut their losses with their head above water should they need to sell, or participate in a bigger upswing should the market start to rise again looking ahead a few years.