A 15-year mortgage offers buyer’s lower interest rates but higher monthly payments. The greatest benefit of the fifteen-year mortgage is that homeowners will own their home much sooner. Many lending sources prefer the 15-year mortgage and offer fixed rate prices. Many buyers shy away from this type of mortgage simply because it requires higher payments each month. Though this is not necessarily a bad thing for some it can be financially devastating to most. Outside of that downfall it has numerous financial benefits in the long run. Those with a 30-year mortgage will reduce their monthly payments but ultimately pay more interest over time. Before deciding on a home or potential mortgage a mortgage comparison should be performed to help narrow down the best option for your financial future and present budget.
In-Depth Mortgage Rate Comparison
Though the fifteen-year mortgage is most preferred it is not the only mortgage option available. It can be compared to other mortgage products such as the adjustable rate mortgage also known as ARM, a jumbo mortgage and the 30-year mortgage.
- The ARM mortgage will give buyers a low interest rate and payment for a set period of time. This time period is generally between one to seven years. However, after that time the interest is adjusted to a higher rate and can be financially taxing on some homeowners. Initially the ARM rate may be 50% less than a 15-year rate, which makes it appealing to most.
- The 30-year mortgage rate is offered at a fixed rate over the life of the loan however; it takes longer to pay off. Interest rates for a 30-year mortgage are nearly 0.50% to 0.75% more than that of a 15-rate. Though the monthly mortgage payment is low more money will be paid over the life of the loan.
- Jumbo Mortgages are used primarily to pay for expensive homes that cost more than $400,000. Lenders consider this type of mortgage a higher risk so it is offered at a higher interest rate of about 1% more than a traditional fifteen-year mortgage rate.
The Best Time To Get A 15-Year Mortgage
There are a variety of factors that affect mortgage rates. However, the best time to get a fifteen-year mortgage is when interest rates are low. Rates will naturally be lower when the demand for mortgage loans is reduced. When there are more requests for mortgages lenders can increase the amount of interest on the overall loan amount. However, when there are fewer people looking to buy interest rates will be reduced.
Another common factor that affects mortgage rates is the federal government. The Federal Reserve indirectly affects mortgage rates. It controls the discount rates offered to lenders when they borrow money from Fed. A buyer’s credit score also plays a part in the interest rate offered to purchase a home. Higher credit scores are offered better interest rates while lower scores are considered high risk. Lenders typically charge higher rates to individuals with less than perfect credit. Rates are higher for poorer credit scores regardless of which mortgage program selected. Buyers with significantly low credit scores may be denied credit from lenders. However, if approved they spend thousands of dollars more than those with a higher credit rating.
When interest rates or lower and fees reduced is typically the best time to consider a mortgage. Prices are typically better and much more affordable for homebuyers. This is especially true for first time homebuyers.
15-year Mortgage Benefits
The obvious benefit of a fifteen-year mortgage rate is paying off your house in half the time of a 30-year. Though monthly mortgage payments are higher homeowners are saving thousands of dollars in interest at the end of the loan period. A prerequisite of this benefit is the amount of money being freed up each month once the home is paid off. This is a lucrative benefit to a 15-year mortgage.
Equity is another major benefit. Individuals with a shorter payment period build equity much faster than those with a 30-year mortgage. Most of the money spent on a mortgage payment goes to the interest rather than the principle. Homeowners with a 30-year mortgage will have a considerably large portion of the actual cost of the home to pay. Within a fifteen-year period they may still owe more than half of the cost of the home. Equity becomes important for a few reasons, primarily because it shows how much ownership the owner has invested in the actual cost of the property. Buyers with a 15-year mortgage are also able to sell their house much sooner than other mortgages. This is good news to individuals who are looking to live in their home for less than ten years.
Another benefit of this type of mortgage is having fixed payments. Unlike some of the other mortgages a 15-year mortgage has a locked in interest rate. The monthly payment will not increase due to any reason other than a missed payment. This benefit comes with the piece of mind of knowing exactly how much is owed each month. ARM rates are less predictable because they can go up after a seven-year period. Homeowners are usually left uncertain on how high the interest rate will increase. Once it does go up it may pose cause economic hardship on some owners.
Individuals with a 15-year mortgage rate are likely to experience more financial freedom. Their money is not tied up in monthly payments and they can sell the house once they reach a certain amount of years. They also have 100% equity at the end of the fifteen years. Financially this is the best option for long-term financial freedom. It also provides a bit of room for individuals looking toward retirement.
Hidden Costs To Watch For
Though there are many benefits associated with the fifteen-year mortgage there are a few hidden costs buyers should be aware of.
Fees are one of the most overlooked costs in mortgage loans. There are application fees that are often paid at the time of the application. This fee is usually non-refundable and it is simply charged for applying. There is however, one exception to paying this fee. Applicants with poor or low credit ratings do not have to pay because loan officers have to do a series of paperwork to determine if you will receive an approval. Origination fees are also charged for processing the loan. This can be charged as a percentage of the approved mortgage amount or charged as a flat rate. Origination fees are also equal to one point.
Points are also another way for lenders to profit from a 15-year mortgage. Lenders charge buyers mortgage points to offset some of the interest they won’t receive. They may include these fees inside closing costs to be paid by the homeowner. It may also be placed within the approved loan amount. Points are typically one percent of the mortgage. One percent of a $200,000 loan amount is equal to $2,000. Sellers of the property are usually responsible when going through the VA or FHA. Homebuyers may want to work out arrangements or negotiate with homeowners on paying this fee. It can boost the amount of interest due if it is added into the loan. For first time homebuyers who pay the upfront points fee are eligible for a tax deduction during income taxes. Points on the back are fees that are charged by loan officers who sell applicants or homebuyers a loan with a higher than average interest.
These are fees that are charged to homeowners who pay off the loan ahead of schedule. By paying off a loan before it’s scheduled due date lenders lose money from interest. A prepayment penalty can be as much as 2% of the cost of the mortgage loan. This is usually a hidden fee that is not often mentioned, as there are not that many cases of early pay-offs on mortgages. This fee has many disadvantages especially if a homebuyer decides to refinance the cost of their mortgage. In most cases this fee can be avoided if the loan is paid off after five to seven years.
A balloon payment is a fee that is often hidden within the terms of the loans. Many homeowners are unaware of this fee and it can cause them to go into foreclosure. Lenders may require a homeowner to pay off the mortgage loan in its entirety by a specific due date. If the loan is not paid in full by the date specified the homeowner would ultimately go into default by the lender and have the home put into foreclosure. Learning about this type of fee before signing contracts or loan agreements is important. Balloon mortgages usually taken out for a fifteen-year period but then it must be paid back by the fifth or seventh year of the loan. This type of loan is not beneficial for individuals who are unable to pay off a large sum of money in half of the fifteen-year period.
Credit Score a Big Factor
The key to getting a great 15-year mortgage is to maintain a good credit score. This directly affects the amount of money offered to you to purchase a home. It will also determine how high your interest rate will be. Having a lower than recommended credit score will not only boost the amount of interest but also reduce the amount of a potential loan. Lenders are also more likely to tack on additional fees and hidden charges to borrowers with a less than perfect credit rating. This can cost thousands of dollars as a result.
Other key things a borrower can do to lower interest rates is to shop around. This can work to their advantage if the borrowers credit score is considered “A” credit. Having more than one lender interested in offering a loan will give borrowers the best rates. Homeowners who choose this type of mortgage will spend more on the front end than those with a 30-year mortgage. However, they will save thousands of dollars on the back end. Homeowners with a fifteen-year mortgage are also able to sell their homes much sooner and build equity much faster as well. There are many benefits to this type of mortgage compared to the others but should not be chosen if finances will prevent you from meeting the required payment each month.
This type of mortgage is not for everyone an especially individual with limited income. Hidden fees are a major factor that should be considered before signing any agreements. Being financial prepared with closing costs and point fees will get you in the home quicker. Speak with lenders about any possible fees especially when shopping around. This can save potentially hundreds or thousands of dollars in hidden fees or charges.