Another Way to See the 15-Year Mortgage

NEW YORK ( TheStreet) -- Although the 15-year mortgage is invariably cheaper than the 30-year variety, it often gets little respect because of its larger monthly payments. Not so today. The 15-year deal is, in fact, quite appealing, offering substantial savings through rock-bottom rates.  

Among the ideal candidates are homeowners who have plenty of equity and want to refinance at a lower rate. For them, the higher-principal payment on the 15-year deal may be easy to bear, allowing the borrower to focus on the low, low interest rate.  
These days a 15-year mortgage is quite appealing, offering substantial savings through rock-bottom rates for a refinancing or new mortgage.

A survey shows the average 15-year mortgage charging a scant 3.164%, versus 3.788% on the average 30-year loan.  

The 15-year loan generally charges half to three-quarters of a percentage point less than the longer-term loan. But when the rates are this low, that margin is especially beneficial because it is bigger in relation to the overall rate.  

At 3.164%, the 15-year loan charges 16.5% less than the 30-year deal. In June 2007, before the financial crisis, the 15-year charged 6.4% and the 30-year 6.73%. The 15-year, therefore, charged only about 5% less.  

When the difference is very small, as in 2007, the 15-year loan does not provide enough savings to offset the big disadvantage: the larger monthly payment required to pay off the debt, or principal, in 15 years instead of 30. But today's large margin relative to the overall loan rate can tip the balance in favor of the 15-year deal, so long as the payment is affordable.  

At 3.164%,  you would pay just under $700 a month for every $100,000 borrowed. While that is significantly more than the $465 you would pay to borrow for 30 years at 3.788%, the 15-year deal would dramatically cut interest charges over the life of the loan -- to $25,729 versus $67,500 for the 30-year deal.  

This makes 15-year loans especially attractive as a refinancing option for homeowners whose debt is not terribly large -- people who have owned their homes for a number of years, for example.  

In fact, financial experts generally recommend that in a refinancing, the borrower keep the term on the new loan to no longer than the time remaining on the old one. Otherwise, the savings from a lower rate will be offset by additional years of interest payments.  

Is there a downside to the 15-year deal? As mentioned above, you'd pay about $235 more a month for every $100,000 borrowed. That's not really money out of your pocket because it is a principal payment that reduces your debt. In other words, you would build equity in your home faster.  

That $235 could go to other purposes, though. If you found an investment that could return more than the interest rate on the loan, it might make sense to invest instead. Payments toward mortgage principal can be thought of as a fixed-income investment with a yield equal to the mortgage rate. These days, earning more than 3% on a guaranteed investment is not bad, but someday it could look stingy.

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