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December 16th, 2009

Lower Rates, Higher Payment, is the 15-Yr Mortgage Right for You?

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Are you looking for a mortgage rate even lower than five percent, but not interested in an adjustable rate mortgage? Have you considered a 15-year fixed-rate loan? Like the 30-year conforming rate, 15-year rates are at historic lows:

The move to shorter-term loans comes as rates on these mortgages have dropped to near historical lows. Rates on 15-year fixed-rate conforming mortgages averaged 4.46% last week, according to HSH Associates in Pompton Plains, N.J., well below their recent high of 5.25% in mid-June. Rates on 30-year fixed-rate conforming loans averaged 4.99%, or about half a percentage point higher.

The 15-year mortgage has enjoyed only mild popularity since it has one main flaw: your monthly payments will be substantially higher compared to a term twice as long.

Using the numbers seen above, and utilizing HSH’s amortization calculator, let’s calculate the difference in your monthly payment if you were to chose a 15-year loan over a 30-year.

A $200,000 loan at 4.46% for 15 years would yield a monthly payment of $1,525.90. The same loan amount at 4.99% for 30 years would yield a monthly payment of $1,072.42 — a difference of $453.48.

To avoid the drastic difference in monthly payments, many borrowers have chosen to refinance their 30-year loan into a 15-year term. The borrowers who have used this strategy to their advantage have already had a mortgage for several years:

“It’s entirely a refinance phenomenon,” says Jay Brinkmann, chief economist of the Mortgage Bankers Association.

Many borrowers attracted to 15-year loans took out their previous mortgage six or seven years ago and would prefer to shorten the term of their mortgage rather than extend it, says Michael Menatian, a mortgage banker in West Hartford, Conn. Because they have already paid down some principal, the increase in payment isn’t as great as it would be if they were earlier in their mortgage, he adds.

The combination of a lower interest rate and a lower loan balance found on a six-to-seven-year-old loan serves to offset a portion of the up to 40% increase in monthly payment.

A shorter term loan can save a bundle of money over the long haul. While the higher payment will be a challenge for some homebuyers, refinancers have an excellent chance to take advantage of these record-low rates, possibly with little impact on their budget.

Is anyone out there considering shortening the term on their loan?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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