15-year mortgage Archives » Larry & Kathy Reichle

How to get one of those record-low 15-year mortgage rates for your refinance

August 26, 2021 by Kathy Reichle Leave a Comment

In the days before the pandemic, 15-year mortgages — with their usually stiff monthly payments — were far too expensive for many people refinancing their homes. Borrowers often just grabbed another 30-year home loan, America’s go-to mortgage.

But with the COVID crisis keeping mortgage rates in the cellar, even the 15-year option has been looking cheap. That’s especially true right now, with 15-year rates at an all-time low in the latest survey from mortgage giant Freddie Mac.

More borrowers have been choosing the shorter-term loans: In May, 15-year mortgages accounted for 15.8% of all home loan originations, up from just 5.5% in May 2019, according to the latest data from the Urban Institute.

Here’s how to evaluate if a 15-year fixed-rate mortgage is right for you — and how to land one of today’s all-time-low 15-year rates.

Today’s 15-year mortgages offer big savings

Serious man and woman calculating bills, using calculator and laptop, online banking services, family discussing and planning budget, focused wife and husband checking finances together

Average rates on 30-year fixed-rate mortgages are deep below 3% at the moment, reflecting worries among investors that the COVID-19 delta variant could torpedo the economy’s comeback from the pandemic.

Thirty-year rates this week are averaging 2.77%, not far from early January’s typical rate of 2.65%, which was the lowest in the 50-year history of Freddie Mac’s weekly survey.

But rates on 15-year fixed-rate loans are even cheaper and, in fact, are currently at a record low: averaging a mere 2.10%.

Let’s be clear: Because of their shorter repayment period, 15-year mortgages will give you a much higher monthly payment than a 30-year loan. But with 15-year rates at all-time lows, payments also will be as low as can be.

Here’s an example of how you can save with a 15-year mortgage right now: In early August 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 2.10%, that same loan will cost you $1,620 per month, or $19,440 a year

— for annual savings of close to $1,600.

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 $1,296 with a 15-year loan, but only $819 with a 30-year mortgage — a $477 difference.

That might be a deal breaker for some, but when you consider the lifetime interest you’d save with the shorter loan term, the high monthly payment isn’t quite so bad.

The total interest you’d pay by refinancing into a 15-year mortgage at 2.10% would be more than $33,000, while you’d have to fork over about $95,000 in interest for the 30-year loan at 2.77%. That’s an extra $62,000.

Don’t forget that in addition to saving more than $62,000, you’d pay off your debt in half the time.

Why shorter mortgage terms have better rates

House and coins place on the wood table is ladder with white illustration, representing lower mortgage 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 mortgage, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or pump up your credit score by 200 points or more.

How to find the best 15-year mortgage rate

credit score concept on the screen of smartphone, checking payment history and ranking in bank

To land a 15-year mortgage, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or pump up your credit score by 200 points or more.

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 — you can easily check your score for free online, and get tips on how to boost it if it’s low.

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 over the life of a loan — so don’t jump 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.

August 9, 2021 by Shawn Utley

How much house can I afford to buy?

June 26, 2018 by Kathy Reichle Leave a Comment

If you’re thinking of making the move from renter to homeowner, simply diving into home shopping is the wrong first step. What you need to do is first answer the question:

“How much house can I afford?”

The best way to determine your spending ability is to do a step-by-step calculation. While there are alternate rules of thumb for figuring out your housing budget — such as a ceiling of 2.5 times your annual salary or limiting your housing payments to a third of your gross monthly income — you should not take shortcuts on a financial decision as important as this.

Calculating ‘how much mortgage can I afford?’

Here are the major factors you will need to consider to determine how much house you can afford to buy:

Income.

First, add up the income that will be used to qualify for the mortgage, including bonuses and commissions. Make sure you have the documentation to prove every source of income; otherwise it cannot be counted when you meet with a mortgage lender.

Debt.

Add all the payments you make each month for car loans, credit cards, student loans and any other debt. Based on your income, there are limits on how much debt you’ll be allowed to carry, including your mortgage. These debts will limit how much mortgage you can borrow.

DTI ratio.

When a mortgage lender calculates your level of debt based upon how much money you make, it is known as your “debt-to-income (DTI) ratio.” Debt-to-income ratios are the province of mortgage calculators. One important ratio, referred to by mortgage professionals as your “front-end” or “top-end” ratio, is calculated by taking your proposed housing expense divided by your gross (before-tax) income. Many mortgage calculators set 28 percent as the desirable value for this ratio. The other ratio involves all of your loan payments – your housing expenses and your monthly debts (but not utilities or other living expenses) — divided by your gross monthly income. A home affordability calculator frequently set this number at 36 percent. This is called your “back-end” or “bottom-end” ratio.

Monthly obligations.

While your mortgage lender cares about your auto and credit card payments, they really don’t care whether you have cable TV, the latest iPhone or even that you eat on a regular basis. Those monthly expenses are up to you to include, and cable, smartphones and a few trips to the grocery store can easily add up to several hundred dollars each month.

Down payment.

The minimum down payment for an FHA loan is 3.5 percent; for conventional loans, the minimum is 3 percent for certain buyers and 5 percent for most buyers.

Taxes.

Today, it’s easy to get an idea on a home’s property taxes by looking at the listing online. You can also get in contact with the county tax office or ask a local Realtor to investigate for you. Most homeowners will have their property taxes paid from an escrow account attached to their monthly mortgage payments. One percent in taxes is equal to $1,000 per year for a $100,000 home.

Insurance.

Lenders require homeowners insurance to cover your property. Contact an insurance company or ask a Realtor to estimate your homeowners insurance costs which will vary according to the type of property, cost and features of the home, and its location. To get a rough idea, you can ask a family member or friend what they pay for insurance (if their home is similar to the home you are interested in buying).

Homeowners association dues.

If the property you purchase includes monthly dues, don’t forget to include those fees in your monthly payments.

Mortgage insurance.

If you make a down payment of less than 20 percent on a conventional loan, you will need to pay mortgage insurance. You can utilize HSH.com’s mortgage insurance calculator to see how much this could cost each month. For FHA loans, there is an upfront and annual mortgage insurance premium.

Interest rate.

You can check today’s mortgage rates at HSH.com, but remember that your rate will depend on your credit score, the type of property you are buying, and the choices you make regarding fees and points. A lender will be able to give you a customized mortgage quote given your situation.

Loan term.

While many buyers opt for a 30-year home loan, if you can afford higher monthly payments, you may want to consider a shorter loan term. Shorter loans have lower interest rates and cost you less over the life of the loan.

As a homeowner, you need to have enough money set aside in an emergency fund — at least three months worth of expenses – in case you lose your job or have a medical emergency, and enough reserves set aside to pay for maintenance and unexpected repairs.

Considering all your financial goals and your monthly comfort level with your mortgage payment is the key to accurately calculating how much house you can afford. It’s smart never to borrow the maximum amount you can qualify for so that you leave yourself some financial breathing room.

Keith Gumbinger

4 Reasons You Should Consider A 15-Year Mortgage Right Now

August 23, 2016 by Kathy Reichle Leave a Comment

Pop quiz: Would you like to make half as many mortgage payments and owe thousands less in interest over the life of a loan, all while paying a lower interest rate? If you answered “yes” to any part of that question, 15-year mortgages are worth considering, suggests Justin Arnold, a CFP (Certified Financial Planner) who runs WashPark Capital in Denver, CO. We agree! A 15-year mortgage can make good sense for your situation — and they’re more affordable than ever. If you’re looking at real estate anywhere from Seattle, WA, to homes for sale in Boston, MA, here’s why you should consider this type of mortgage with a shorter payment term.

1. Save more money

Taking out a 15-year mortgage dramatically cuts your home loan repayment time. The faster you repay the loan, the less in interest you need to pay. This can save you tens of thousands of dollars over the (shorter) life of your loan. A 15-year mortgage also usually offers better interest rates than other loan products, says Debbie Todd, a CPA who runs 1 Hour Impact.

Curious about just how much money you could save? Check out this mortgage calculator and plug in the numbers specific to your situation. You can compare the amount of payments, interest rates, and more. Seeing the difference between paying off your mortgage in 15 years versus 30 years could be the motivation you need to consider a 15-year mortgage.

2. Build more equity

When you repay your mortgage faster, you don’t just save money — you build equity in your home faster too. Combine a shorter mortgage term with rising home prices, and you could exponentially grow the amount of equity you have.

This is beneficial for several reasons, especially if you want to refinance the loan down the road. “Since you are paying principal faster with a 15-year note,” explains Therese R. Nicklas, CFP, “you will be building equity faster, making refinancing potentially easier.” With a smaller loan-to-value ratio, the risk you present to your lender will be smaller, so you should have more financial opportunities.

3. Reduce pressure on your monthly budget in retirement

Getting a 15-year mortgage might help if you plan to retire in the next 10 to 20 years. Many people want to downsize before they retire, and that means buying a new home. “Choosing a 15-year mortgage allows you to reduce the strain on your cash flow in retirement,” says Eric Roberge, a financial planner who runs Beyond Your Hammock in Boston, MA.

“You can take advantage of stronger cash flow while you’re working to make the bigger monthly payments that a 15-year mortgage requires and pay off the loan before you retire,” Roberge says. “Then, when you do retire, you won’t have to pull as much out of your savings to cover living expenses since your loan will be gone.”

4. Take advantage of the built-in discipline

Instead of considering 15-year mortgages, some people take out a 30-year mortgage and simply accelerate the payments they make on that loan. They get the benefit of saving money on interest but aren’t tied to the higher monthly payment. But Todd Tresidder, a money coach at Financial Mentor, explains that while this sounds good, the situation isn’t always so simple. “If your intention is to pay off the mortgage in 15 years, then commit to it,” he says. “You may prefer the flexibility of a lower mortgage payment by getting a 30-year loan, and you may honestly have the best intentions to add principal to pay it off in 15 years anyway.” However, many people just don’t follow through with that plan. It’s too easy to fall back on making the smaller, easier payment and using the extra payment money for other purchases instead. “Without the enforced discipline of the required payment, it won’t happen,” says Tresidder. “So just be honest with yourself.”