The average cost of a 15-year fixed-rate mortgage fell to a new record low this week at 2.55 percent, according to Bankrate’s weekly rate survey. That’s down one basis point from last week’s 2.56 percent, which was the previous record.
With the U.S. economy in recession because of the coronavirus pandemic, mortgage rates have plunged to record lows across loan periods, and have stayed down throughout the summer, even as the 30-year benchmark rebounded slightly this week.
Most people think of 30-year fixed rate loans when they’re talking about mortgages, but if you can afford the extra monthly costs, there are some major benefits to shortening your loan term.
15-year mortgages usually have lower interest rates, and because they’re paid off over a shorter period of time, they accrue less interest overall than longer 30-year mortgages. That means that, although they cost more on a per-month basis over the life of the loan, 15-year mortgage holders realize big savings compared with 30-year mortgages of the same principal.
So, if you’re looking to get a new mortgage or are thinking about refinancing, it’s worth giving 15-year loans a close look.
“If you’re looking to shorten your loan term and can handle the higher payments that come with it, the 15-year fixed rate mortgage is compelling, with the lowest rates under 2.5 percent,” said Greg McBride, Bankrate’s chief financial analyst. “You’re locking in a rate pretty close to where inflation is likely to be over the next decade and a half.”
Keep in mind that the interest rate and total amount of interest paid on 15-year fixed-rate mortgages is less, but the monthly payments are more.
Depending on your financial situation, it’s easier to qualify for a bigger loan with a 30-year mortgage because the monthly payments are lower. A lender won’t back a loan that you can’t afford, so even if the total amount is the same, the difference in monthly payments can change what’s financially feasible for some borrowers.
That said, it’s smart to buy less house than you can afford and pay it off faster. That’s the surest and fastest way to build wealth.