Before the pandemic hit, the traditionally steep monthly payments of 15-year mortgages were way too expensive for many Americans buying homes or refinancing existing mortgages.
America’s most popular mortgage — the 30-year fixed-rate home loan — has typically been far more affordable than the 15-year option.
But as mortgage rates plunged to all-time lows last year, even 15-year loans started looking cheap. And more borrowers turned to them: In December, 15-year mortgages accounted for 13.8% of all home loan originations, up from 10.7% a year earlier, according to the Urban Institute.
Now, as mortgage rates are surging, 15-year loans are looking attractive because of their much lower rates than 30-year mortgages. Here’s how to evaluate if the shorter-term loan is right for your — and how to get the lowest 15-year rate.
Today’s 15-year mortgages can mean thousands in savings
Rates on 30-year fixed-rate mortgages have surged above 3% in recent weeks, as the new stimulus checks and more widespread vaccinations have had investors feeling more optimistic about the economic recovery.
Last week, 30-year rates were averaging 3.09%, according to mortgage giant Freddie Mac — the highest since last June. But rates on 15-year fixed-rate loans were averaging just 2.40%.
Let’s be clear: Even with rates that are now more than half a percentage point lower than for 30-year fixed-rate mortgages, 15-year loans will give you a much higher monthly payment.
But today’s 15-year rates are among the lowest in history (the record low earlier this year was an average 2.16%), so the payments also among the cheapest ever.
Here’s an example of how you can save with a 15-year mortgage right now: In March 2019, when the average for a 15-year fixed-rate mortgage was 3.76%, a $250,000 loan would have cost you $1,819 per month, or $21,828 a year.
But at the current average rate of 2.40%, that same loan will cost you $1,655 per month, or $19,860 a year — for annual savings of close to $2,000.
15-year mortgage vs. 30-year loan
Even better, the shorter-term mortgage will cost you tens of thousands of dollars less in total interest versus a 30-year loan.
If you were to refinance a $200,000 balance at the current average rates, your monthly payment would be $1,324 with a 15-year loan, but only $853 with a 30-year mortgage — about a $470 difference.
That might be a deal breaker for some, but when you consider the lifetime interest you’d save with the shorter loan term, thr high monthly payment might not seem so bad.
The total interest you’d pay by refinancing into a 15-year mortgage at 2.40% would be about $38,400, while you’d have to fork over roughly $107,000 in interest for the 30-year loan at 3.09%. That’s an extra $68,600.
Don’t forget that in addition to saving close to $69,000, you’d pay off your debt in half the time.
Why shorter mortgage terms have better rates
The average interest rate on a 15-year fixed-rate mortgage is usually lower than the average on a 30-year loan because shorter loans are generally seen as less risky by lenders.
However, since a 15-year mortgage requires a higher monthly payment, the criteria needed to qualify for one is often stricter than for a 30-year loan.
You might ultimately decide the bar is too high and that you’ll have to look for other ways to cut your housing costs — maybe by shopping around to find a lower rate on your homeowners insurance.
To land a 15-year mortgage, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or pump up your credit score by 20 points or more.
How to find the best 15-year mortgage rate
To ensure you’ll get the best rate possible on a 15-year refi, you’ll want to check your credit score before you start looking for offers.
You’ll need a score in the “very good” (740 to 799) or “excellent” (800+) range if you want lenders to feel confident about working with you.
If you haven’t been keeping tabs on your score lately, that’s OK — there are online services that will let you check your score for free, and give you tips on how to boost it if it’s low.
Once your credit score is ship-shape, you’ll want to shop around and compare quotes from at least three to five lenders to find the best 15-year loan offer.
Research from Freddie Mac has found that comparing five rates can save a borrower thousands of dollars over the life of a loan — so don’t jump at the first offer you get.