15-year mortgages: Deal of the century?

Posted by  on May 30, 2012

Rates for 30-year mortgages are getting a great deal of attention for being so low today, and deservedly so. However, it is the rates for the less-publicized 15-year mortgage terms that may actually be the deal of the century.

It's not just that 15-year rates are lower than 30-year rates -- that's perfectly normal. What makes 15-year mortgage rates so attractive is that over the past year, they've become an essentially cost-free source of capital.

Mortgage rates and inflation

Early 2012 has seen the lowest mortgage rates on record. By early May, 30-year mortgage rates were down to 3.84 percent, and 15-year mortgage rates were down to 3.07 percent.

In general, the longer the payback period for a loan, the higher the interest rate will be. That's why it's normal for 30-year rates to be higher than 15-year rates. What's striking about current 15-year mortgage rates -- and what is certainly not normal -- is that those rates have fallen low enough to be virtually even with the prevailing inflation rate.

Normally, 15-year mortgage rates run about 3-6 percent above inflation. This represents the profit incentive for making the loan, and the true cost to the borrower. However, over the past year, 15-year mortgage rates have averaged just 0.12 percent over inflation. On a purchasing-power basis, this means the loan is virtually cost-free -- the value of the interest is essentially no higher than the rate of inflation.

This is unique in the recorded history of 15-year mortgage rates. The 21st century hasn't offered much in the way of financial bargains, so 15-year mortgage rates may very well be the deal of the century to date.

Two great uses for 15-year mortgages

While 30-year mortgages are generally more popular, here are two great uses for the 15-year variety:

  1. Home buyers with ample cash flow. If you can afford paying more month-to-month, a shorter and cheaper mortgage means much less interest expense over the course of the loan.
  2. Mortgage refinance. If you've already paid off several years of a 30-year mortgage, why re-inflate the term back to 30 years upon refinancing?

Current mortgage rates are so low that it's easy to get excited about 30-year mortgage rates. However, it's important not to overlook 15-year mortgage rates in the process, as they may be the best deal you'll see in a while.


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