Rates Keep Falling; 15-Year vs. 30-Year Fixed-Rate Mortgages
They hit all-time record lows again today, as the entire mortgage industry scrambles to handle the influx of refinances.
Don’t take the 15-Year Fixed! Take the 30-Year Fixed – Please!
When rates move this low, borrowers often ask if they should opt for a 15-year mortgage instead of a 30-year so they can pay off their mortgage sooner.
Our answer is usually no – as long as borrowers invest the savings derived from the lower 30-year payment.
30 to 15-Year Spread; Payment Savings
For a $500,000 loan, the “no points” rate for a 30-year fixed-rate purchase money loan would be about 3% today, depending on all the factors affecting the rate (LTV, Credit, Lock Period, etc.).
The 15-year rate would be about 2.625% today (all assumptions being equal).
So the spread between the 30-year and the 15-year rate is only about 3/8’s of a percent today.
For a $500,000 loan the 30-year payment will be about $2,108 per month, and the 15-year payment will be about $3,363.
So the savings from the 30-year would be about $1,255 per month (set out in the table below).
| LOAN TYPE | RATE | PAYMENT |
|---|---|---|
| 30-Year | 3.0% | $2,108 |
| 15-Year | 2.625% | $3,363 |
SAVINGS FROM LOWER PAYMENT: $1,255
If a borrower invested that $1,255 in savings every month into an account that earned only 5%, the principal balance would be about $337,000 after 15 years.
In 15 years though, the 15-year mortgage will be paid down to zero while the 30-year mortgage will still have a balance of about $304,000 ($33,000 less than what will be in the borrower’s investment account).
Hence, borrowers will not only have a higher net worth in 15 years if they take a 30-year mortgage and invest the savings, borrowers will also have a lot more liquidity to access along the way in case they ever need that liquidity for any reason (job loss, tuition, medical bills, home repairs, etc.).
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
