For people who plan on living in a home for a longer period of time, there may be an even cheaper option than the 30-year fixed rate mortgage (FRM). The 15-year FRM offers just as much, and comes with a few advantages of its own.
Pros of borrowing with a 15-year FRM
1. Lower mortgage rates
Despite the drawback that refinances on this loan will come out as less than they would on a 30-year loan, the rates to begin with are already lower. An average 15-year FRM (conventional and jumbo) currently hold rates as low as 4% on an average day at large lenders. A 30-year FRM on an average day currently carry rates as high as 4% at large lenders. This can be verified daily here on LoanSafe under our rates section.
2. Cheaper interest payments
With less overall interest being paid out over the entire life of the loan, a borrower pays less with a 15-year FRM. Interest payments are bundled up with the entire monthly payment along with everything else that comes in the package. The price of interest however, comes out to be a significant portion of the entire payment plan. A 15-year loan will help you save on this significant portion of your loan. With a $300,000 30-year mortgage currently running at 4.5% interest, you’d end up paying well over $200,000 in interest over the life of the loan. With a $300,000 15-year loan currently running at 3.625% interest, you’d end up paying just $89,360 during the life of the loan.
3. Short loan life
With less to pay, the entire thing gets paid off in half the time without twice the amount of the mortgage in interest.
4. Less in Mortgage Insurance
Monthly mortgage insurance payments that are also packaged into the entire monthly payment depends on the size of the loan and down payment that was paid. If your loan size was smaller, then your down payment would potentially have been smaller as well. Homeowners with lower loan sizes could potentially reach a higher loan-to-value ratio sooner as well.
Cons of borrowing with a 15-year FRM
1. Higher monthly payments
Although some of the payments such as interest and mortgage insurance would be lower, the shorter life span of a 15-year loan comes at the cost of more to be paid out each month.
2. A scenario where rates suddenly lowered
While fixed rate loans and adjustable rate mortgages both have their functions, one drawback of any FRM is the fact that it is the same for the life of the loan. There are still homeowners paying off mortgages that existed back when rates were 6% and above. Rates are currently much lower than they were years ago. There is no way of knowing if they will rise or drop in 2014, however they could potentially remain where they are or go lower. While this could be seen as a disadvantage by some, in the end it all has to do with the borrowers desires.
3. Higher rates compared to adjustable rate mortgages
Again, it all has to do with the perspective of the borrower. Despite the fact that the rates of a 15-year FRM are lower than those of a 30-year FRM, they’re still not as low as the rates of an ARM.