What is a 15-Year Mortgage?
A 15-year mortgage is fixed-rate home loan amortized over 15 years. This type of loan has a fixed monthly payment, while the amount that goes toward the principal increases over time.
You can get 15-year conventional, VA loans, or FHA loans, depending on your financial situation. Government loan terms allow you to have less mortgage points and contribute lower down payment. The eligibility requirements for government-backed loans are less strict.
A 15-year mortgage can be a good alternative to a 30-year fixed mortgage as it has much lower total interest closing costs, such as loan origination fees, as customers pay interest for half the time. Another contributing factor to this loan is that the annual percentage rate (APR) for a shorter loan term is usually lower, which allows customers to save money. However, as customers pay off their loans in half the time, monthly payments are much higher.
The significant competitive advantage of these types of mortgages is fixed rates and payments that remain the same during the loan life. Hence, when customers borrow a loan, they know exactly when they will become debt free and what their total costs will be. With adjustable-rate mortgage, the interest rate will vary based on the Prime Rate.
Pros and Cons
Pros
- Lower Interest Rates. A 15-year fixed-rate mortgage generally has lower interest rates than 30-year mortgages, which means you will pay less in interest over the life of the loan.
- Faster Equity Build-Up. With a shorter loan term, you will build equity in your home more quickly, giving you more financial stability and potentially allowing you to refinance or sell your home for a profit.
- Lower Lifetime Cost. Because the loan term is shorter and the interest rates are lower, you will pay less overall for your home compared to a 30-year mortgage.
- Improved Financial Discipline. A 15-year fixed-rate mortgage requires higher monthly payments, which can be a good way to enforce a budget and save money in the long run.
Cons
- Higher Monthly Payments. The shorter loan term means higher monthly payments, which can be a burden for some homeowners.
- Limited Financial Flexibility. The higher monthly payment and shorter loan term may leave you with less money to put towards other financial goals, such as saving for retirement or paying off debt.
- More Restrictive Eligibility Criteria. Some lenders have stricter eligibility criteria for 15-year mortgages, so it may be more difficult to qualify for this type of loan.
- No Option to Refinance. With a 15-year mortgage, you may not have the option to refinance to a longer loan term if your financial situation changes, which can limit your flexibility in the future.
What Affects a 15-Year Mortgage Rates
Mortgage rates for a 15-year fixed-rate mortgage depend on several factors, including economic conditions, government policies, and the lender's own risk tolerance. Understanding these factors can help you make informed decisions about your mortgage and potentially secure a better interest rate.
- Economic Conditions. Economic conditions play a major role in determining mortgage rates. When the economy is strong, demand for loans increases, which can push up interest rates. Conversely, when the economy is weak, interest rates may decrease as lenders compete for business. The Federal Reserve's monetary policy also plays a role in determining mortgage rates, as changes in interest rates can affect the cost of borrowing.
- Government Policies. The government-sponsored entities Fannie Mae and Freddie Mac play a significant role in the mortgage market by purchasing loans from lenders and then securitizing them. The policies of these entities can influence mortgage rates, as changes to their underwriting standards or lending practices can affect the availability and cost of loans. The government can also offer programs that provide incentives for homeownership, such as tax credits or subsidies, which can make mortgage financing more attractive and potentially reduce interest rates.
- Lender Risk Tolerance. Finally, each lender has its own risk tolerance and will set mortgage rates based on their assessment of the borrower's creditworthiness, the loan's collateral, and other factors. Lenders will consider the loan-to-value ratio, the borrower's income and employment history, and other factors to determine the likelihood that the loan will be repaid. The lower the perceived risk, the lower the interest rate may be.
There are also other factors that can impact 15-year mortgage rates, such as changes to the bond market and global economic conditions. It's important to monitor these and other factors when considering a 15-year fixed-rate mortgage, as they can impact the availability and cost of financing.
Is it worth refinancing to a 15-year mortgage?
Whether refinancing to a 15-year mortgage is worth it depends on several factors, including your current financial situation, the current interest rate environment, and your long-term financial goals.
One of the main benefits of refinancing to a 15-year mortgage is the potential to secure a lower interest rate. If interest rates have dropped since you obtained your current mortgage, you may be able to lower your monthly payments and overall interest costs by refinancing.
A 15-year fixed mortgage will typically result in faster equity buildup compared to a 30-year mortgage. This is because the shorter loan term means that you will pay off the mortgage more quickly, which can help you build equity in your home more quickly.
By paying off the mortgage more quickly, you'll also pay less in total interest costs over the life of the loan. This can result in significant savings over time, especially if you have a significant amount of mortgage debt.
The shorter loan term of a 15-year mortgage means that your monthly payments will be higher compared to a 30-year mortgage. This can make it more challenging to manage your monthly budget, especially if you have other financial obligations or are living on a tight budget.
A 15-year mortgage is a much shorter term compared to a 30-year mortgage, which means that you have less time to pay off the mortgage. This can make it more difficult to adjust to changes in your financial situation, such as a job loss or a reduction in income.
Refinancing a mortgage typically involves paying various fees, such as closing costs, appraisal fees, and other charges. These costs can add up quickly and may make refinancing more expensive than it's worth, especially if you're not going to save much money on your monthly mortgage payment.
How to get a good 15-year mortgage rate?
Getting a good 15-year mortgage rate requires preparation and a thorough understanding of the factors that impact mortgage rates. Here are some steps you can take to help ensure that you secure a competitive rate:
- Check Your Credit Score. Your credit score is one of the most important factors that lenders consider when determining your interest rate. Make sure you have a good understanding of your credit score and work to improve it if necessary. You can obtain a free copy of your credit report once per year from each of the three major credit bureaus: Experian, TransUnion, and Equifax.
- Save for a Down Payment. The amount of money you have saved for a down payment can also impact your interest rate. Lenders may be more likely to offer you a better rate if you have a larger down payment, as this reduces the loan-to-value ratio and the lender's risk.
- Shop Around. Don't be afraid to shop around for the best mortgage rate. Compare rates from multiple lenders, including banks, credit unions, and mortgage lenders, to ensure that you get the best possible rate. You can also use online tools, such as rate comparison websites, to compare rates and find the best lender for your needs.
- Consider a Fixed-Rate Mortgage. Fixed-rate mortgages are a good choice for borrowers who want predictable monthly payments and a stable interest rate. If you're considering a 15-year mortgage, make sure that you choose a fixed-rate option to help ensure that your rate remains stable throughout the life of the loan.
- Have all of your documentation ready. When you're ready to apply for a mortgage, make sure that you have all of the necessary documentation, such as proof of income, employment, and asset information. Having everything ready and organized will help the process go more smoothly and may also increase your chances of getting a good rate.
- Consider a Conforming Loan. Conforming loans are mortgages that meet the guidelines set by Fannie Mae and Freddie Mac. These loans are generally easier to obtain and may come with lower interest rates compared to non-conforming loans.
- Be Prepared to Act Fast. Interest rates can change quickly, so it's important to be prepared to act quickly when you find a good rate. Consider working with a lender who can provide you with rate lock options, which allow you to lock in a rate for a set period of time, even if rates change in the meantime.
Getting good 15-year fixed mortgage rates requires preparation, research, and a thorough understanding of the factors that impact mortgage rates. Start by checking your credit score, saving for a down payment, and shopping around for the best rates. Make sure that you choose a fixed-rate mortgage and have all of your documentation ready. Be prepared to act quickly when you find a good rate and consider working with a lender who can provide you with rate lock options. By following these steps, you can increase your chances of securing a competitive 15-year mortgage rate and successfully finance your home.
