Americans now love 15-year fixed mortgages

Rates on a 15-year fixed mortgage are so low that many homeowners can afford the higher payment, which allows them to pay off their mortgage in 15 years instead of the standard 30.

|
Michael Sloan
By refinancing their 30-year home loan into a 15-year fixed mortgage, one couple from Washington State expect to save $70,000 in interest charges.

Move over, 30-year fixed-rate mortgage. A shorter-term loan is enticing scores of home-owners to switch, now that they can finally afford to do so.

Record-low rates are helping transform the 15-year mortgage from a rarely used instrument into a popular option, especially for refinancers. In November, 23 percent of refinance applications were for 15-year loans, according to the Mortgage Bankers Association. That's up 51 percent from a year earlier.

The trend has gained steam since the economic slowdown led consumers to start slashing their debts. Fifteen-year mortgages made up just 8.5 percent of all refinance loans in 2007, but they made up 35 percent of the total last year, according to CoreLogic, a consumer research firm based in Irvine, Calif. One reason: Paying off the note in half the time means huge long-term savings in interest payments.

"Consumers are financially savvy, and they recognize 30-year fixed mortgages are a bargain," says Frank Nothaft, chief economist at Freddie Mac, a major provider of mortgage capital based in McLean, Va. "But then they say, 'Gosh, a 15-year fixed is three-quarters of a percentage point even lower'.... You can lock that in and never have to worry about refinancing again."

While 15-year loans have always been an interest-saving option, they usually come with a trade-off: higher monthly payments. That's because 15-year loans are structured to pay down principal more aggressively each month.

But today's extraordinary rates are changing the calculus. Interest on a 15-year loan hasn't been this low since at least the 1940s. Seldom have 15-year loans been so much cheaper than 30-year loans, according to Mr. Nothaft.

Until mid-December, Jeffrey and Amber DeGraaf of Kennewick, Wash., were paying 5.75 percent on a 30-year adjustable-rate mortgage that they took out in 2005 for $149,000. Their monthly payment was $1,097.

When they refinanced in December into a 15-year fixed at 3 percent, their monthly payment rose by only $123. The benefits far outweighed the $3,600 in refinance charges, Mr. DeGraaf says. The family expects to save around $70,000 in long-term interest. Plus they'll own their three-bedroom home free and clear eight years sooner.

"A lot of people would say, 'Another $120 a month? I don't know if I've got that'," says DeGraaf, a government contractor. "But to me, if you can afford it, it's worth it. You have your house paid off sooner. And you think about all the interest that you now won't be paying."

The DeGraafs have plenty of company, especially in regions where home prices aren't so high that a larger monthly payment would be out of the question. In five Midwestern states with relatively strong economies and low home prices, 30 to 40 percent of all refinanced loans are for 15-year terms.

The trend has followers on the coasts, too. Gesa Credit Union, based in Richland, Wash., which refinanced the DeGraafs, authorized 330 new 15-year refinance loans in 2012, up from 200 in 2010.

"In the second year of [a 15-year] loan, more than half of your payment is going towards principal," Randy Wacker, Gesa's vice president of mortgage lending, says via e-mail. "On a 30-year loan, that doesn't happen until year 11!"

The 15-year loan isn't for everyone. More than 80 percent of loans for new home purchases still utilize the 30-year fixed. For first-time buyers, the 30-year's low payments can be critical to home-ownership's success, Nothaft says.

Yet for those who can afford a higher payment, there's no reason to wait to refinance, he says. "We're not anticipating further substantial declines in mortgage rates from these very, very low levels. So since they're at pretty much the low right now, why delay?"

It doesn't help the economy in the short run to have consumers steering disposable income into larger monthly loan payments, according to Mike Fratantoni, vice president of research and economics for the Mortgage Bankers Association in Washington, D.C. But long term, "households have been saving more and accumulating less debt. That's going to build a more sustainable framework for [economic] growth going forward because people are living a little farther from the edge" of insolvency.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Americans now love 15-year fixed mortgages
Read this article in
https://www.csmonitor.com/Business/2013/0128/Americans-now-love-15-year-fixed-mortgages
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe