15- or 30-Year Loan: Which Adds Up?

MortgageloanThe 30-year fixed-rate mortgage has been a stalwart of today?s real estate market for homeowners looking to refinance. Now it?s facing competition from the 15-year fixed-rate mortgage.

In August, the number of applications for 15-year refinancing loans submitted nationwide through the LendingTree.com website was up 29 percent from August 2010, while 30-year refinancing loans saw a 12 percent increase.

?It?s all the trend right now. Most borrowers are asking about switching to a 15-year-loan. Everybody?s in a mood now to get those mortgages paid off. They want to see an end to those payments, and that?s what?s driving it,? said Kristine Marr, a senior loan officer with RPM Mortgage in Walnut Creek.

Such loans result in huge savings in terms of interest payments but require larger monthly payments than a 30-year loan.

In the past few weeks, there has been a big increase in homeowners who are looking to refinance into a 15-year-loan, said Kevin Conlon, senior vice president of operations at San Ramon, Calif.-based Mason-McDuffie Mortgage.

Retirement considerations play a role along with a desire to build equity faster.

Homeowners are thinking, ?I really don?t want to restart the clock for 30 years if I?m retiring in 20 years,? he said.

The best candidates to consider these loans are homeowners who have paid down a 30-year mortgage for at least five years, have sufficient equity and excellent credit, are secure about their job future, and can handle the higher payments, say mortgage professionals.

?It can shave years off their mortgage,? Conlon said.

But not all borrowers are in a position to switch.

?Some borrowers might not qualify for the loan with the larger monthly payments because it increases their monthly debt-to-income ratio,? Marr added in an email. ?Some borrowers are choosing the 30-year fixed for the security of the lower payments.?

Another point worth considering is that homeowners with 30-year mortgages can always increase their monthly payments to pay down their mortgage faster.

?This (option) is a great compromise for many borrowers,? Marr said.

Interest rates for 15-year loans are typically lower than 30-year loans.

The average interest rate for a 15-year fixed-rate mortgage was 3.30 percent for the week ending Sept. 15, according to mortgage giant Freddie Mac. Compare that with the 30-year-fixed, where the average interest rate was 4.09 percent.

And the shorter time frame of the 15-year-loan translates into paying much less interest than a 30-year loan.

Say a borrower had taken out a $330,000 30-year fixed-rate mortgage with a 5.25 percent interest rate five years ago and had paid down the balance to $300,000. If the balance was refinanced into a 15-year mortgage at 3.5 percent, the monthly payments would now be $2,144.

If the balance was refinanced into a 30-year loan with a 4.25 percent interest rate, monthly payments would be $1,475, or $669 less. But over the life of the loan the borrower would end up paying about $145,000 more in interest than with the 15-year loan.

Paying less in interest is worth the higher monthly payments, said Jason Katz, 40, a story supervisor at Pixar Animation Studios in Emeryville, Calif., who refinanced into a 15-year loan from a 30-year loan a few months ago.

?We?ve cut our loan duration in half and more significantly we?ve cut the interest we would be paying way down,? he said. ?It puts us in this perfect place in five years. We will have significantly more equity in the house. If we stay for 10 years, it?s more equity. If we stay for 15 years, which is totally feasible, we own the house.?

Five years ago, Jason and his wife, Layla, had used a 30-year-loan with an interest rate of 6.4 percent to purchase their home in Oakland, Calif. They had considered refinancing into a 30-year loan before opting for the 15-year loan with a 4 percent interest rate.

Before refinancing, they paid down a big chunk of the original $960,000 mortgage. That way, the new mortgage would qualify under the $729,750 conforming jumbo loan limit, which on Oct. 1 will be lowered to a $625,500 maximum amount. (Interest rates on conforming loans are typically one-half percent lower than nonconforming loans.)

Their monthly payments are now $5,398. That?s more than the $3,699 monthly payment under a 30-year-loan with a 4.5 interest rate. But if they had gone with the 30-year loan, they would have paid an additional $359,495 more in interest payments over the life of the loan.

?The (interest) savings are incredible if you run the amortization table on a 30-year versus a 15-year,? said Dianne Crosby, a senior loan consultant with LaSalle Financial Services in Oakland who helped the Katzes refinance into their new loan. Still, homeowners should be sure their financial future is secure before opting for a 15-year loan.

?One of the questions (borrowers) have to ask is can they manage the payments,? she said. ?I?m finding more and more, that clients are concerned about potential job loss.?


?Own your home in half the time.

?Builds equity faster while paying significantly less in interest.

?Interest rates are typically 0.5 to 1 percentage points lower.


?Monthly payments are higher.

?The maximum mortgage interest tax deduction is less because the borrower is paying less interest over the life of the loan.

?If the borrower becomes unemployed or if their income takes a dramatic hit because of a financial emergency, it will be harder to keep up with the payments.

Source: Distributed by MCT Information Services