I’m seeing and hearing a bunch of ads these days for 15-year fixed rate mortgages. The frequency that I’m encountering them is reminiscent of liar loan ads circa 2007. When a man spends millions of dollars to tell me that he’ll save me money I know that someone’s getting played.
Does anyone know what’s with the uptick? A change in regulations? Some new financial instrument? Laxer oversight by government agencies?
From what I’ve seen, there’s nothing significantly nefarious about it. It started when the economic downturn caused by horribly bad thirty year loans being written, and it was suggested as one of the things to do if you were able to get out of a really bad thirty year loan. The reason why a lot of people started pushing them after that is simple capitalism: offer whatever is “hot” in the news.
It has long been true that if you can afford the higher payments, that a fifteen year loan will result in you owning your house twice as fast (duh), and cost you a LOT less total interest (sneakier to understand).
The fun thing is, you can get all the benefits of a fifteen year loan, and none of the down side, if you get a thirty year loan, and send in EXTRA PRINCIPLE with every payment you make.
I don’t have a factual answer, but I have a guess.
Interest rates are edging up. The Federal Reserve has raised interest rates twice this year. So people who have been thinking of buying a home are more motivated to pull the trigger. With more people thinking about buying, lenders are cashing in on the market.
I got a 30-year, fixed-rate loan when I bought my house in 2003. In 2010 I refinanced to a 15-year, fixed-rate loan. My payments didn’t go up that much. (I’m thinking about a double-sawbuck or so.) But then, I bought the house just at the very beginning of the housing bubble, so it was still cheap. Today, Zillow estimates my house is worth 1.8 times what I bought it for. 
Plus, a lot of people who bought during the bubble are 10-15 years into their thirty year mortgage so are ripe to refinance into a 15-year without feeling as though they’re starting over.
You can generally get a lower rate on a 15 year loan vs a 30 year loan. Looking at my credit union website. The 15 year mortgages are 3.5% and the 30 year are 4.5% So you cannot get all the benefits of a 15 year loan by paying extra principle.
I’d forgotten about that. I did get a lower interest rate when I refinanced.
I think the reason 15yr in particular gets emphasized when rates are rising is it gives the ability at least cosmetically to offer borrowers what they’ve come to view as ‘good rate’ with recency bias. Given that as has been mentioned 15yr rates are usually lower than 30 yr. 0.8% or so lower now. Now’s 15yr mortgage rates are in the ballpark of where 30 yr rates where when rates were lowest.
But a 15yr mortgage is a major cash flow challenge to a lot of people relative to their expectation of house they ‘should’ be able to afford.
Being skeptical of ads is a good habit. OTOH the expectation that ‘regulation’ would ever make it safe to not know what you’re doing in personal finance is a dangerous idea IMO. It’s not a categorically anti-regulation idea, it’s mainly an anti-ignorance idea (though mixed with some skepticism about the net effect of regulation in many cases).
A few days ago I got a call from my current lender asking me if I wanted to refinance. When I asked what he could do for me, he admitted that they couldn’t do much better than my current 30-year rate. Accordingly, the only thing they can push on me is to take more money out of my house, or roll over to a shorter length.
And it really is a LOT! We bought our house with a 15yr mortgage and, even assuming equivalent interest rates, we’ll end up paying ~$83K less in interest than we would have on a 30yr.
I got my house with a 30-year mortgage and paid it off in 13 years. That saved me almost $70,000. And that was on a fairly small mortgage (around $140K).
Bolding mine.
Odds are it’s not you getting played. Remember that mortgage origination companies are commission sales agents for the actual lenders.
Yes, he’d be glad to sell you a mortgage where he gets a commission and your costs go up. He’d be even gladder to sell you a mortgage where he gets a commission and your costs go down. It’s a much easier sale that way and for him it’s all about volume.
One point I don’t see mentioned her is that lenders make money off of people refinancing. That’s why you see more advertising. It has nothing with them wanting to save you money, competing lenders don’t make any money if people don’t switch. You saving money is just a good advertising ploy that is actually true as long as you can afford to do so. And there is always the chance that you will fall behind on your new mortgage and have to go back to a 30 year loan that they can make money off of you again.
Nitpick: PRINCIPAL. And some mortgages have an early payoff penalty, though those are typically only applicable if you pay more than 20% of the loan in a year.
Except for the lower interest rate. However, in lieu of the slightly higher interest rate, you have the flexibility to pay less if you want/need to in a given month and no one cares.
Using very rough numbers here, my mortgage is about $1050 a month, but I pay $1500. With that, it’ll be paid down in 15 years instead 30. But, should I ever need some extra cash for whatever reason, I can simply pay less towards my mortgage. It’s a quick way to free up a few hundred dollars a month, no phone calls, no collection agencies, no red marks on my credit report, no asking the bank for a HELOC.
Furthermore, if things change for me some time in the future [financially], I have the option of paying less towards my mortgage (backing off to the actual amount due) before taking a more drastic approach of refinancing specifically to free up money.
It should also be noted that while I am putting a good amount of money towards my house, I also have no credit card debt and have a nice (not huge, just nice) amount of savings. If I lost my job, I’m not going to be eating out of garbage cans next week because I was racing to pay my mortgage down.
It’s interest rate risk. In rising rate environments, shorter loans are favorable to the lender, as they recoup their money sooner and can re-lend at higher rates. In today’s market, no lender prefers the 30-year mortgage over a 15.
In addition to the lower interest rate, 15 year mortgages carry opportunity cost.
EXACTLY! But DO remember to write on the memo line of the check*** that the extra amount is to be applied to the principal ONLY***. Years ago we switched to a 15-year mortgage, made extra payments as often an as much as possible. In addition to paying our mortgage off early, we STILL got the benefit of the tax deduction for our interest payments. Go for it, if you can. Even if you can’t, making just ONE extra payment a year can pay your mortgage off much earlier.
Look at it this way: suppose you have a mortgage payment, the principal being $1200 a month; add just $100 a month to your payment. You’ll be amazed.
I think people should acquire a mortgage with a sufficiently short term such that it will be paid off by the time they retire (and when most people have a lower income).
You are one smart gal/guy! I tip my hat to you.
When we refinanced to a 15-year loan, we were able to put so much more in the principal that we paid it in full two years before my dh retired. I can’t tell you what a relief it was to know that, whatever else happens, we’ll still have this old rattletrap over our heads. And that left us with enough to install solar panels on our roof and get a $14K tax credit. :)…oh yes, and almost zero electricity bills.
When my father bought his house in 1971, he had a twenty year mortgage fixed rate at a low rate, I don’t remember what. When Jimmy Carter was president interest rates shot up and the bank went to him, and all the low fixed rate people and said, if you double the payments we’ll cut your interest in half. There were a few lean years, but in basically in 4 more years, he owned the house outright. He said it was the best deal he ever made.