Posted on Sunday, May 24, 2009
FINALLY the mortgage industry is reporting an increase in 15 year fixed rate mortgages. Let's face it, the main reason any of us would get a 15 year loan over a 30 year loan is because we want to own our home free and clear as soon as possible. What an amazing concept!
Granted 15 year mortgages carry lower interest rates than their 30 year sister loans (generally about a quarter of a point less) but overall the payments on a 15 year mortgage tend to be bigger than those on a 30 years since the borrower is paying more principal with each payment monthly in order to have the loan paid back in half the time. The payment on a $400K 15 year loan at 4.375% interest is $3034 a month compared to a comparable 30 year loan payment which today would be around $2056 a month.
But come on folks, paying off principal is not a "cost." It more akin to taking one asset (cash) and converting it into another asset (home equity). Sort of like a forced savings account.
PLUS if you factor in the overall savings in interest between a 15 year and a 30 year loan you can practically pay for your kids college tuition! In the above example, the interest saved by choosing a 15 year over a 30 year loan is a whopping $194K!
New 15 year mortgages increased from about 40K in Jan to about 75K in Feb. And the dollar volume more than doubled again from Feb to March from about $7.5 billion to about $16 billion.
One thing to consider, if the 15 year loan will make it really difficult for you to make that larger payment and may put you at risk of not being able to pay it, think twice. An alternative is to take the 30 year loan and make extra payments against principal. There are programs available on line to calculate how often you will need to make the extra payment to put you in the same position you would be in with a 15 year loan. But again, if you can swing it, "GO 15."
Washington should be encouraging this type of decisions making by giving us all more incentives to do it. Maybe special tax write offs for folks who elect to pay of their loans quicker or owe their homes from and clear. Maybe bailout money to help make the rates on 15 year loans even lower or annual payments to rewards people who keep current on them. Maybe taxes on cash out refinance funds to disuade people from using their homes like ATMs. Or higher pay structures for mortgage brokers who sell more 15 years loans (or conversly, take the broker who sell the riskier loans - anything to dissuade them from pushing those higher products that generally generate more money for them). Until then we'll need to remind ourselves that Going 15 is just the right thing to do.