They're on a jagged course — up for a few weeks, then back down — but mortgage rates are gradually working their way higher. And that's made the difference between 30-year and 15-year fixed-rate mortgages more pronounced.
If you're a homeowner considering a refinance, a 15-year loan may look more appealing than ever. While the typical 30-year is back in the neighborhood of 3%, 15-year rates are still averaging in the low 2s.
In the days before COVID-19, 15-year mortgages, with their usually stiff monthly payments, were far too expensive for many refinancers. Borrowers often just grabbed another 30-year home loan, America's go-to mortgage.
But now, the shorter-term option can be surprisingly affordable.
Today's 15-year mortgages can offer big savings
Average rates on 30-year fixed-rate mortgages have been dancing around the 3% line as financial markets weather surging inflation and the Federal Reserve's plan to start tapering its pandemic policies.
Mortgage giant Freddie Mac says the typical 30-year rate, which dropped to a record 2.65% in January, stood at 2.98% last week.
But rates on 15-year fixed-rate loans are much cheaper — averaging 2.27%, which is relatively close to the recent all-time low of 2.10%. And, it's not hard to find lenders offering 15-year fixed rates under 2%.
Let's be clear: Because of the shorter repayment period, a 15-year mortgage will give you a much higher monthly payment than a 30-year loan. But with the average 15-year rate not far from record-low territory, payments are among the lowest ever.
Here's an example of how a 15-year mortgage is more affordable right now: In mid-November 2019, when the average for a 15-year fixed-rate mortgage was 3.20%, a $250,000 loan would have cost you $1,751 per month, or $21,012 a year.
But at the current average rate of 2.27%, that same loan will cost you $1,640 per month, or $19,680 a year. Your annual costs would be $1,332 lower compared to a loan from two years ago.
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 $1,312 with a 15-year loan, but only $841 with a 30-year mortgage — a $471 difference.
That might be a deal breaker for some, but when you consider the lifetime interest savings from the shorter loan term, the higher monthly payment may not seem quite so bad.
The total interest you’d pay with a 15-year mortgage at 2.27% would be more than $36,000, while the lifetime interest for the 30-year loan at 2.98% would total about $103,000. That’s an additional $67,000.
Don’t forget that in addition to saving more than $67,000, 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-term loans are generally seen as less risky by lenders.
However, since a 15-year mortgage requires a steeper 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 home loan, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or boost your credit score by 200 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 — these days you can easily check your credit score for free to see if it needs improvement.
Once your credit score is in good shape, you’ll want to shop around and compare quotes from at least 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 extra — so don't leap at the first offer you get.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.