Home buyers tend to fix upon property prices when sizing up a purchase, but it’s the interest accumulation that can really dent a homeowner’s bank account.
With interest rates significantly higher in 2022 (rising from 3.4% in September, 2021 to 6.7% in September, 2022), home buyers are paying considerably more for a mortgage these days.
One way to curb the high cost of a mortgage is with a 15-year mortgage. While it’s not easy to handle the higher payments associated with 15-year mortgages, it’s worth it once you pay the loan off.
A case in point. LendingTree recently analyzed 381,000 mortgage loans from July to August this year.
The analysis found that mortgage loan borrowers who choose 15-year, fixed-rate mortgages could save an average of $214,899 in interest over the lifetime of their loans compared to borrowers who choose 30-year mortgages.
One area of analysis is of particular interest. According to LendingTree, mortgage rates are usually significantly lower for 15-year fixed mortgages.
“Across the nation’s 50 states, the average APR offered to borrowers with a 15-year fixed mortgage is 5.14% — 92 basis points lower than the average APR of 6.06% offered to 30-year fixed borrowers,” the report stated.
Even though buyers make larger payments with a 15-year mortgage (Lending Tree pegs that number at $572 more in monthly payments), a shorter mortgage schedule is a good deal for homeowners.
"Unfortunately, the higher monthly costs associated with shorter-term mortgages will likely make them too expensive for many borrowers to afford,” said Jacob Channel, LendingTree’s senior economist. “With that said, for those who can afford them, the long-term savings they provide can be well worth the short-term costs."
While a 15-year mortgage offers a deep discount over the long haul, they work better for some home buyers than others.
“However, with the rise in home prices over the past few years, 15-year mortgages often don’t work well for first-time homebuyers or those trying to upgrade to a more expensive home,” said Peter Idziak, attorney at the mortgage law firm Polunsky Beitel Green. “The higher monthly payment required on a 15-year mortgage means the borrower will qualify for a lower loan amount than they would on a 30-year mortgage. That reduced borrowing power may price a potential buyer out of the market entirely.”
It's also worth noting that inflation will eat a good chunk of that $215,000 saved on a 15-year mortgage.
“The $200,000 figure reflects the total amount of interest saved over 30 years,” Idziak said. “Due to inflation, a dollar in 2052 will be worth less than a dollar today, so that number becomes a little less eye-popping.”
Additionally, the amount of savings assumes the borrower never refinances or sells the home over the 30-year term.
“Nationally, the average length of homeownership is about 15 years,” Idziak noted. “Most homeowners will ultimately pay off or refinance a 30-year mortgage before it matures, so they may not realize the full projected savings.”
What can homeowners do to make a 15-year mortgage work? Finance experts advise focusing like a laser beam on the household budget.
"Depending on how well a family budget is sustained, I would start there,” said Nicole Rueth, SVP of The Rueth Team Powered by OneTrust Home Loans. “Ask yourself, where are we spending money that is either not giving us joy or solving basic human needs?”
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Rueth advises using a snowball method to attack one bill and then apply the funds used for that debt to the next debt.
“Once that’s accomplished, a family might have more funds available,” she said.
Another idea is tied to today’s higher interest rates.
“If a family is burdened by debt, doing a cash-out refinance into a 15-year note paying off all other debt,” Rueth added. “The monthly payment might even be lower by rolling it all into a longer-term fixed mortgage instrument."
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