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15 Year Fixed Rate Mortgage

A type of mortgage where the interest rate never changes for the duration of the loan. Unless the mortgage has an interest only or other payment option features, payments are amortized over 15 years, that is, the homeowner makes equal monthly payments and the entire loan would be paid off in 15 years.

One argument for the 15 year fixed mortgage is that you are able to pay off the loan sooner. However, others argue that you do not want to pay off the loan so that you can take advantage of paying interest on debt that is deductible.

When an investor purchases bonds or invest in bank CD's, the longer he commits his money for, the higher his interest rate, or yield, will be. The same is true in the mortgage industry, loans with longer terms have higher interest rates. The 15 Year Fixed Rate Mortgage usually carry interest rates that are 0.5% lower than the 30-Year Fixed.

Most borrowers don't realize that you can actually run a 15 year schedule with a longer term mortgage if you are disciplined enough to make extra equity payments.

Cash Flow or Pay Option mortgages, including those with Fixed Rates and Adjustable Rates, all offer a 15 year payment option for borrowers who wish to occasionally make a more substantial payment to principal, however 15 year mortgages have declined in popularity in recent years due to the substantially higher monthly payments associated with them. For homeowners who are interested in building equity in their home at a faster rate, an interesting alternative on certain cash flow mortgages with this feature is a biweekly payment option, which can allow a borrower to pay down a 30 year amortized mortgage in as little as 22 years or less depending on the payment level chosen.

Be sure to ask your mortgage professional what the rate difference is between a 30 Year and 15 Year Term. In times where short term interest rates are in some cases higher than long term rates, there is a limited benefit in locking in a shorter term on a mortgage loan.

Interest rates are typically lower on a 15 year fixed rate mortgage, depending on the lender and the loan program. You will build equity faster with a 15 year loan, than what you will with a 30 year loan. The reason is that more of your payments are being applied to the principal, at an earlier point than that of the 30 year fixed rate mortgage.

People are amazed at how much money they save on a 15 year mortgage versus a 30 year mortgage. Anytime you are over 80% LTV and you are required to pay PMI and you obtain a 15 year fixed rate mortgage, the percentage of coverage required for PMI is significantly lower than the percentage required for a 30 year mortgage. An example would be on a 100,000, 30 year loan at 90% LTV you might be required to have 25% coverage for your PMI (which would basically equal a PMI monthly payment of around $43.33). Now on a 100,000 loan on a 15 year term at 90% LTV you might be required to have 12% coverage for your PMI (which would equal a PMI payment of $19.17 per month). Therefore, by using a 15 year term vs. a 30 year term you may be able to cut your PMI by less than half.

Amidst all the various newly introduced home financing options, Fixed Rate mortgages remain a popular loan program, mostly due to the fact the some homeowners are uncomfortable with the thought that their mortgage payments can fluctuate.

Since a 15 year fixed rate mortgage comes with a considerably higher monthly payment than its 30 year counterpart, this loan would be best suited for borrowers who have good monthly cash flow. Also borrowers who have high balances on other consumer type debt would be advised to avoid this loan at least until the other debt is paid down. It usually would not make sense to accelerate the payment of low interest, tax deductable mortgage debt while slowly servicing high interest, non-tax deductable consumer debt.

It is also possible to pay the equivalent of what would be a 15 year amortized payment, even on an actual 30 year amortized loan. Doing this will give the borrower a huge interest savings by paying the loan off earlier, and at the same time, give them the option to make a lower monthly payment, or revert back to their 30 year payments all together, should they need to.

If you are unsure whether you will be able to continue making payments on a 15 year mortgage at some point down the road, consider a longer-term mortgage, where you pay less each month. Your mortgage professional should be able to tell you how much extra to pay each month if you still want to pay off the loan in 15 years.

 
 

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