15-Year Mortgage Loans Surge in Popularity

While the 30-year fixed rate mortgage loan has long been the traditional choice of homebuyers, recent data show a growing trend by home shoppers to opt for a 15-year mortgage.

The number of 15-year mortgages rose by 43% in February compared to the previous month; in dollar terms, 15-year mortgage loans more than doubled from February to March, and this pattern is expected to continue amid the current refinancing boom. 

What’s the allure of the 15-year mortgage? Homebuyers may be experiencing a growing abhorrence of debt, understandable in the current recession, and want to pay off their debt as quickly as possible. That’s a good thing, because it sets the stage for disciplined mortgage holders to enjoy their retirement days free of mortgage debt.

Still, the 15-year mortgage is not a slam-dunk decision for everyone, since 15-year mortgages will command significantly higher monthly payments compared to a 30-year loan at the same interest rate. In the long run, though, the 15-year mortgage holder would pay $194,000 less in interest over the life of a $400,000 mortgage than on a 30-year loan, according to a New York Times story on the subject.

In the New York Times example, a borrower taking out a $400,000, 15-year loan at 4.375% would have monthly payments of about $3,034 a month, compared to about $2,056 a month on a $400,000, 30-year fixed-rate loan at 4.625%.

Taking on the higher interest payments of a 15-year mortgage also carries added risk should you lose your income. Indeed, some economists predict we’ll soon see a “third wave” of foreclosures as many of those with good credit and prime loans lose their jobs. (The first wave was foreclosures induced by speculators, and the second wave occurred when low-interest introductory rates expired and the rates shot higher, resulting in prohibitively expensive monthly payments.) 

That’s why it puzzles me to see consumers willingly take on such added risk in a climate of continued high unemployment.  There’s a perfectly workable alternative that allows them to pay off their mortgage as quickly as they could with a 15-year mortgage — but without the greater burden they’d face if they were laid off.

Simply take out a 30-year mortgage, but make the higher payments you would make as if it were a 15-year loan. This way, you have the flexibility of stopping the higher payments in the event you lose your income; when your income returns to normal, you can resume the higher payments. The only shortcoming here is that you won’t benefit from the lower interest rate associated with a shorter-term loan. Still, assuming you held onto your job for the duration and that you have the discipline to continue the higher payments, you’d succeed in paying off your loan in just 15 years, with built-in flexibility and safeguards. (Just make sure there are no pre-payment penalties in your loan contract.)

In the end, it’s an individual decision that balances the value of the savings you’d gain from the lower rate of a 15-year loan versus your confidence in your job security and how things would go if you lost your job.  It’s your call.

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