15 Year Mortgage Rates

Today, a great deal of attention is being paid to the ongoing low mortgage rates. In fact, according to Freddie Mac, 30 year mortgages are within a few basis points of being the lowest they have been since at least 1971. However, little attention is paid to the 15 year mortgage. As of the end of march of 2010, the average 15 year mortgage rate was at an all time low since 1991. Although data is not available for the period from 1971-1990 from Freddie Mac, it can be assumed that the 15 year was never below today’s level during that period, either.

Before understanding the benefits of the rate available for a 15 year mortgage, one needs to understand what a 15 year mortgage represents. A mortgage is structured as a stream of payment of both interest and principal. Typically, mortgages are spread out over 30 years which requires a very small amount of principal to be paid in a given year and lowers payments. The problem with a 30 year mortgage is that one needs to pay interest on that money for a very long period of time. A 15 year mortgage is structured to have more principal paid off in a given year which increases the payment, but cuts the term in half. Furthermore, because the term is shorter, which means that the risk to the lender is less, the rate is typically lower.

As of April 30, 2010, the average 30 year conforming fixed-rate mortgage carries an APR of 5.21% with no points. The rate on a conforming 15 year fixed mortgage with no points is 4.54%. When one simply looks at payments on a typical loan with an initial balance of $200,000, the 30 year mortgage is more attractive, as it carries a monthly payment of $1099.46 as opposed to $1534.08 for the 15 year mortgage. However, simply comparing payments does not tell the whole story.

One giveaway of the benefit of a 15 year mortgage is that even though it is paid off in half the time, the payments are significantly less than twice the payment of a 30 year loan. This occurs because one pays significantly less interest over the life of the loan. To be exact, one will pay $195,805 in interest over the life of the 30 year loan and only $76,134 over the 15 year loan. Even if the 30 year loan was at the same rate as the 15 year loan, it would still carry over $166,000 in interest. Another way of looking at this would be that the payment on a 15 year mortgage today is actually meaningfully less than the payment on a 30 year loan at the historical average rate of 8.98%.

Since 15 year loans take so much money out of bank’s pockets, it is not surprising that they are rarely discussed. Nevertheless, at today’s low mortgage rate, 15 year financing makes a great deal of sense.