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Is 15 the New 30? The Best Fixed-Rate Term Depends on You

John Cooke Senior Vice President, Real EstateIn my role as a mortgage lending professional, I’m often asked questions about interest rates.

  • What’s today’s rate for a 30-year mortgage?
  • When will rates increase?
  • Will rates go lower?
  • Is now the best time to refinance to ensure I lock-in the lowest long-term fixed rate?

The current historically low interest rate environment makes “rate chasing” almost fun—and certainly makes for good dialog and debate. But there is more to consider than the rate. My response to these questions always includes a discussion about longer term financial goals and objectives, like mortgage retirement and total interest payments.

Obtaining a low, fixed rate provides both satisfaction and security. Regularly refinancing a 30-year mortgage may generate savings in the monthly payment; however, regularly resetting the loan term may not be the best long term financial strategy. More homeowners are switching into 15-year fixed rate mortgages with the understanding that there is a trade-off. They get lower mortgage rates, but higher monthly mortgage payments.

At today’s rates, a 15-year fixed-rate monthly mortgage payment is 48% higher than a comparable 30-year fixed-rate loan. That’s true for all loan sizes.

Now, 48% more may seem like a much bigger payment each month (and it is!), but remember that with a 15-year fixed-rate mortgage, over the life of the your loan, you’ll pay total interest costs to your lender equal to about 26% of your original starting balance.

By contrast, with a 30-year fixed rate mortgage, your long-term interest costs are roughly 71% of your original starting balance.

In other words, at today’s mortgage rates, for every $100,000 borrowed, with a 15-year fixed rate mortgage, you’ll save $45,000 in interest costs over the life of your mortgage as compared to a 30-year fixed rate mortgage.

And that is definitely worth talking about.