Lewis and Dawn Rose have owned their Anaheim home for 35 years.
Their current 30-year mortgage rate is 4.25%. They have a second home in Arizona with an interest rate of 3.5%.
As mortgage rates continue to tumble, the Roses are seizing the opportunity to shorten their mortgage term to 15 years, lowering their rate to 2.125% and pulling a withdrawal to pay off their vacation home in Arizona.
“I’m nervous about going back to a 30-year mortgage,” Lewis said. “With the rates being as cheap as they are, it also saves fees by putting two loans in one.”
The Roses are part of a spike in the number of borrowers asking to pay off their homes in 15 years instead of 30.
And why not?
This week, Freddie Mac announced his 14th lowest rate since July over 15 years set at 2.16%. Freddie’s 15-year rate was 3.99% on January 3, 2019. This is an astonishing 46% drop in two short years.
Today’s maximum compliant loan amount of $ 548,250 would have a payment of $ 3,569 based on the current rate of 2.16%.
Compare that to a payment of $ 4,053 at the rate of 3.99% from just two years ago. This is a reduction of almost $ 500, or about 12%, on the payment because mortgage money is so much cheaper today.
The Freddie chart shows the 30-year set at 4.51% on January 3, 2019, up from 2.65% this week, the 17th record since March.
The 30-year payment on that same $ 548,250 at 4.51% two years ago would be $ 2,781. Today’s Freddie 15-year fixed rate payment at 2.16% is only $ 788 higher than the 30-year payment two years ago, but your mortgage holiday is coming a lot more quick.
Another advantage of the 15-year fixed is that it adds equity much faster than a 30-year fixed.
Let’s say your house is worth $ 1 million and you have a balance of $ 548,250.
Assuming you got a new loan of $ 548,250 over 15 years at 2.16%, your 180 payments would total $ 642,343. Less than 15%, or $ 94,093, would represent interest.
Conversely, your 360 payments over 30 years set at 2.65% would total $ 795,330, including $ 247,080, or approximately 31% interest.
Assuming regular payments over 15 fixed years, in 15 short years you would be sitting on $ 1 million in home equity with no house payment ever again.
The downside to the 15-year fixed term is obviously the higher payment and more stringent loan approval qualification requirements. You may just not be able to afford the short term.
If you’re up at night worrying about your budget, don’t.
Another potential downside is the opportunity cost. Could you take advantage of your money and earn more by investing in something else?
The cheapest local price I could find for a 15 year fixed was 1.75% with 2 points for a purchase loan and 2.5 points for refinancing an existing home loan. The cheapest 30 year fixed rate I could find was 2.25%, but with slightly lower points.
Are you paying points to lower this rate even further?
Looking at an interest rate of 1.99% on a 30 year mortgage instead of 2.25%, you will definitely feel good. But does the math make sense?
Paying points to lower your mortgage rate is just paying interest up front. Think of a seesaw. The lower the rate, the higher the mortgage settlement costs. The higher the rate, the less it costs.
If you plan to hold your home for three years or less, it almost never makes sense to pay points to reduce the interest rate.
The best way to fix this is to have your mortgage issuer layout a payments and points spreadsheet so that you can consider posting various rates with the accompanying point cost. Seeing the cost of redemption versus the payment savings and the number of months to break even can be cathartic.
Freddie Mac Rate News: The 15-year fixed rate averaged 2.16%, the 14th lowest in history and one basis point lower than last week. The 30-year fixed rate averaged 2.65%, the 17th lowest on record, and down two basis points from last week.
The Mortgage Bankers Association reported a 4.2% drop in loan application volume from two weeks ago.
At the end of the line : Assuming a borrower gets the 30-year average fixed rate on a compliant loan of $ 548,250, last year’s payment was $ 296 more than this week’s payment of $ 2,209.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages with a cost of 1 point: a 30-year FHA at 1.875%, a 15-year conventional at 1.875%, a 30-year conventional at 2.375%, a 15- a conventional high balance over one year ($ 548,251 to $ 822,375) at 2%, a conventional high balance over 30 years at 2.5% and a 30-year jumbo fixed at 2.875%.
Eye-catcher loan of the week: A 15 year old, fixed at 2.125% without points.