Lonestar Financing

Low rates make 15 year mortgages attractive

Ryan CollinsHistorically low mortgage rates are allowing homeowners to pay down their mortgages at a faster rate — even if it means a substantial jump in their monthly payments.

Texas home owners are doing the math and realizing that rates have fallen enough so the increase in payment between a new 15-year mortgage and their current loan is no longer unbearable for their budgets.

The average rate on a 15-year fixed-rate mortgage is below 4% right now, and having a mortgage rate that starts with a “3” is attractive for people who can afford it.

Savvy home owners are seeing that a 15 year mortgage is essentially a forced savings account for homeowners, given that the higher payments help pay down the principal at a much quiker rate. Many Texans have reverted to the goal of paying off their house and getting rid of their mortgage.

Doing the Math – Refinancing into a shorter-term mortgage isn’t a strategy for everyone, however.

Choosing a shorter term usually means you’ll get a better rate — and you’ll pay much less interest over the life of the loan — but a shorter timeframe ramps up monthly mortgage payments significantly.

For example, with a 4.5% interest rate on a 30-year fixed-rate mortgage of $200,000, you would have a monthly payment of $1,015, including principal and interest. That same monthly payment jumps to about $1,480 with a 4% interest rate on a 15-year fixed-rate loan.

Of course, if the refinancing borrower’s current 30-year loan has a higher rate, the difference between the monthly payments could be less. Still, you should count on some increase in monthly payments.

Is a 15 year mortgage right for you? Homeowners shouldn’t take on a 15-year fixed-rate mortgage unless they have substantial savings, including at least a year’s worth of living expenses in liquid accounts. Also, it is recommended he recommends having a debt-to-income ratio below 35%. So if you have a gross salary of $5,700 per month, for instance, your monthly debt — including any mortgage payments, taxes, insurance, homeowners-association dues as well as auto and student loans and credit-card debt — would have to be a max of $1,995 to get a 35% ratio.

Option to 15 year mortgage – Make That Extra Payment

Borrowers who don’t meet those standards, or are worried about future loss of income, might be better served taking a longer-term mortgage but making extra payments to the principal to pay off the loan faster.

For instance, if you refinance a $200,000 mortgage into a 30-year loan with a 4.5% rate, and then apply $100 of the savings to the principal payment each month, you’d save $31,700 in interest over the life of the loan. And you would pay off the mortgage in 25 years, instead of 30 years.

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