15-year loans can save homeowners thousands, build equity faster
Thursday, November 29, 2012
A growing number of Clark County home mortgage borrowers apply for 15-year loans to shorten the length of their payment plans and take advantage of historically low fixed rates, according to local mortgage finance experts.
With rates now below 3 percent on 15-year loans, "People are thinking, 'I want to get my house paid off earlier and be totally debt-free,'" said Lynn Posselt, branch manager and mortgage consultant with Windermere Mortgage Services in Vancouver.
Payments on a 15-year loan can pencil out at about 50 percent higher than the traditional 30-year loan, which can add hundreds more dollars in mortgage payments per year. But more and more borrowers think it's worthwhile because the higher payments can save thousands of dollars in interest over the years, said Glenn Crellin, associate director of research at the University of Washington's Runstad Center for Real Estate Studies in Seattle.
Borrowers are left with an age-old pay-now or pay-more-later decision.
"For somebody who has the economic wherewithal to make the higher payments," the option helps build equity more quickly and saves interest over time, he said.
People are rushing to take advantage of rock-bottom interest rates, said Theresa Springer, a senior loan officer at the Willamette Valley Bank Home Loan Center in Vancouver. Not many new homebuyers choose 15-year loans, but the option is popular with borrowers who are refinancing an existing loan, she said.
If they've paid down the original loan's principal, many borrowers can stay within $50 of their already established monthly payment, Springer said.
"When you shorten the term of the loan and have a significantly lower interest rate, it's bizarrely close to what it was," she said.
Some borrowers who ask for 15-year loans are enticed by the lowest interest rates in more than a decade, according to the Mortgage Bankers Association. At the 15-year mortgage loan's lowest, the interest rate dipped to 2.88 percent in the week ending Oct. 5, and then hit the same mark in early November, according to the MBA's Weekly Applications Survey.
The rate was up to 2.89 percent this week. However, the 15-year fixed rate has not been rising as much as the 30-year fixed rate. The shorter-term loan's interest rate is now nearly a half-point cheaper than this week's average 30-year rate of 3.375 percent, MBA reported. Average 15-year fixed rates have been below 3 percent for weeks.
Consumers continue to respond by picking 15-year loans, a trend since late spring, according to statistics from the Mortgage Bankers Association.
Applications for 15-year fixed-rate mortgages were up 2.7 percent in October from September and rose 30.7 percent from a year earlier, the association data showed.
Borrowers who choose a 15-year loan can not only pay down their debt faster, they can save thousands of dollars over time, Springer said.
For example, a homebuyer borrowing $300,000 would save more than $119,000 over the life of the 15-year mortgage compared to a 30-year product, she said.
On a $300,000 loan, Springer said borrowers would pay about $1,368 per month for principal and interest over 30 years, versus about $2,071 per month over 15 years -- requiring a $703 larger chunk of monthly income, according to Springer.
First-time buyers rarely have the cash to take advantage of such savings, Crellin said. "They are usually really extending themselves as far as they can in order to get the kind of house they want," he said.
That's why, despite the surge in 15-year mortgages, the 30-year fixed rate is the staple of mortgages, according to the mortgage association.