Homebuyers tend to focus on real estate prices when deciding how much to buy, but it’s the accrual of interest that can really affect a homeowner’s bank account.
With interest rates rising significantly in 2022 (rising from 3.4% in September 2021 to 6.7% in September 2022), homebuyers are paying significantly more for a mortgage these days.
One way to reduce the cost of a mortgage is a 15-year mortgage. While it’s not easy to deal with the high payments associated with 15-year mortgages, it’s worth it once you pay off the loan.
Over $200,000 in savings
for example. LendingTree recently analyzed 381,000 mortgages from July to August of this year.
The analysis found that mortgage loan borrowers who choose 15-year fixed-rate mortgages can save an average of $214,899 in interest over the life of their loans compared to borrowers who choose 30-year mortgages.
One area of analysis is of particular interest. According to LendingTree, mortgage rates are usually much lower for 15-year fixed mortgages.
“Across the country’s 50 states, the average APR offered to borrowers with a 15-year fixed mortgage is 5.14% – 92 basis points lower than the average APR of 6.06% offered to 30-year borrowers.
Although buyers make larger payments with a 15-year mortgage (Lending Tree pegs that number at an additional $572 in monthly payments), a shorter mortgage schedule is a good deal for homeowners.
“Unfortunately, the higher monthly costs associated with short-term mortgages will likely make them prohibitively expensive for many borrowers. The savings they provide can be worth the costs in the short term,” said Jacob Channel, chief economist at LendingTree.
Not for everyone
While a 15-year mortgage offers a great discount in the long term, it works better for some homebuyers than others.
“However, with home prices rising over the past few years, 15-year mortgages often do not perform well for first-time homebuyers or those trying to upgrade to a more expensive home,” said Peter Edziak, an attorney with the mortgage division. Polunsky Beitel Green law firm. “The higher monthly payment required on a 15-year mortgage means that the borrower will be eligible for a lower loan amount than if they were to take out a 30-year mortgage. This lower borrowing strength could take a potential buyer out of the market entirely.”
It’s also worth noting that inflation will eat up a large portion of that $215,000 saved in the 15-year mortgage.
“The $200,000 figure reflects the total amount of interest saved over 30 years,” Edziak said. “Due to inflation, a dollar in 2052 will be less than a dollar today, so this number becomes less interesting.”
In addition, the amount of savings assumes that the borrower never refinances or sells the home over a 30-year period.
“Nationally, the average length of home ownership is about 15 years,” Edziak noted. “Most homeowners will eventually pay or refinance their 30-year mortgage before it matures, so they may not realize the full expected savings.”
What can homeowners do to do a 15-year mortgage business? Finance experts advise to focus like a laser beam on the family budget.
“Depending on how sustainable the family budget is, I’ll start from there,” said Nicole Roth, senior vice president of The Rueth Team backed by OneTrust Home Loans. “Ask yourself, where do we spend money that either does not give us joy or solve basic human needs?”
Rueth advises using the snowball method to attack one bill and then applying the money used for that debt to the next.
“Once that is done, the family may have more money available,” she said.
Another idea related to today’s high interest rates.
“If the family is heavily indebted, refinance the cash into 15-year bonds to pay off all other debts,” Roth added. “Maybe the monthly payment would be lower by turning it all into a fixed long-term mortgage.”