Lured by the lowest mortgage interest rates in years, an increasing number of refinancing borrowers are choosing a 15-year mortgage over a traditional 30-year one.
Fifteen-year fixed-rate mortgages accounted for almost 20% of refinance mortgage applications in October 2009, as reported by the Mortgage Bankers Association. That's more than double the 9.1% from a year earlier and almost triple the 7.5% in October 2007.
Why Are 15 -Year Mortgages so Popular for Refinancing?
These loans' popularity has come as their rates dropped to historical lows. Fifteen-year fixed-rate conforming mortgage rates averaged 4.46% in mid-December 2009, according to mortgage statisticians at HSH Associates. Rates on 30-year fixed-rate conforming loans averaged about half a percentage point higher.
Fifteen-Year Home Loan: Disadvantages
While paying off your mortgage early sure sounds like a good idea, there are some caveats:
- Despite low interest rates, your monthly payments are likely to be much higher since you half less time to pay off the loan.
- You are committed to higher payments for the duration of your loan, which can be risky if your income drops.
Some experts don't consider that paying your mortgage down early is a good strategy. Because interest on your mortgage is tax-deductible and rates are at historic lows, it is likely that you could get a better return on funds invested elsewhere.
In addition, money that is paid to your lender cannot be easily retrieved if you experience a financial emergency. The only way to cash out that equity is to borrow against it, and lenders are reluctant to lend if you have lost your job or are otherwise in need.
15-Year Home Loans: Advantages
The advantages of a 15-year mortgage are clear: less debt, faster.
- Faster payoff. Many refinancers took out their previous mortgage several years ago and want to shorten the term of their loan. Because they have already paid down some principal, the increase in payment isn't insurmountable.
- Lower rate. Those paying 5.5% or higher can knock a full percentage point off their interest rates. If you have been paying 5.5% on a $300,000, 30-year loan for 5 years, your payment is $1,703, and it will take you 25 more years to pay off your loan. By refinancing that balance to today's 4.375% 15-year rate, your payment increases by only $400 and you pay your mortgage off ten years sooner.
Many homeowners see the 15-year mortgage as a good investment. Rather than putting money in the bank or risk losses in the stock market, conservative investors prefer to put the cash into their homes.