By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | January 10, 2021.
Lewis and Dawn Rose have owned their Anaheim home for 35 years.
Their current 30-year mortgage rate is 4.25%. They have an Arizona second home with an interest rate at 3.5%.
As mortgage rates continue their precipitous drop, the Roses are seizing the opportunity to shorten their mortgage term to 15-years, knocking their rate down to 2.125% and pulling cash-out to pay off their Arizona vacation home.
“I’m nervous about going back to a 30-year mortgage,” said Lewis. “Rates being as cheap as they are, it also saves fees by putting two loans into one.”
The Roses are part of a spike in the number of borrowers applying to pay-off their homes in 15-years instead of 30.
And why not?
This week, Freddie Mac announced its 14th record-low rate since July for the 15-year fixed at 2.16%. Freddie’s 15-year rate was 3.99% on Jan. 3, 2019. That is an astonishing 46% drop in two short years.
Today’s maximum conforming loan amount of $548,250 would have a $3,569 payment based on the current 2.16% rate.
Compare that to a $4,053 payment at the 3.99% rate of two short years ago. That’s shaving nearly $500, or about 12%, off the payment because mortgage money is so much cheaper today.
The Freddie chart shows the 30-year fixed at 4.51% on Jan. 3, 2019, compared with 2.65% this week, the 17th record low since March.
The 30-year payment on that same $548,250 at 4.51% of two years ago would be $2,781. Today’s 15-year Freddie fixed-rate payment at 2.16% is just $788 higher than the 30-year payment was two years ago, but your mortgage burning party comes many years faster.
Another advantage of the 15-year fixed is it adds equity much faster than a 30-year fixed.
Let’s say your home is worth $1 million and you have a balance of $548,250.
Assuming you got a new $548,250 loan for 15 years at 2.16%, your 180 payments would total $642,343. Less than 15%, or $94,093, would be interest.
Conversely, your 360 payments for a 30-year fixed at 2.65% would total $795,330, of which $247,080, or about 31% would be interest.
Assuming regular payments on the 15-year fixed, in 15 short years, you would be sitting on $1 million of home equity with never a house payment again.
The downside of the 15-year fixed obviously is the higher payment and more stringent loan approval qualification requirements. You simply might not be able to afford the shorter term.
If you are up at night worrying about budgeting this, don’t do it.
Another potential downside is opportunity cost. Could you leverage your money and earn more by investing in something else?
The cheapest local price I could find for a 15-year fixed was 1.75% with 2 points for a purchase loan and 2.5 points for to refinance an existing mortgage. The cheapest 30-year fixed I could find was 2.25%, but with slightly lower points.
Do you pay points to drive that rate down further?
Looking at an interest rate of 1.99% for a 30-year mortgage instead of a 2.25% rate can sure make you feel good. But does the math make sense?
Paying points to buy your mortgage rate down is simply paying interest in advance. Think of a teeter-totter. The lower the rate the more the mortgage settlement costs. The higher the rate, the less it costs.
If you are going to keep your home for three years or less, it almost never makes sense to pay points to buy the rate down.
The best way to attack this is have your mortgage loan originator layout a payment and points spreadsheet for you to consider showing various rates with the accompanying point cost. Seeing the buydown cost compared with the payment savings and the number of months to break even can be cathartic.
Freddie Mac rate news: The 15-year fixed rate averaged 2.16%, the 14th record-low, and one basis point lower than last week. The 30-year fixed rate averaged 2.65%, the 17th record-low, and down two basis points from last week.
The Mortgage Bankers Association reported a 4.2% decrease in loan application volume from two weeks ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $296 more than this week’s payment of $2,209.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 1.875%, a 15-year conventional at 1.875%, a 30-year conventional at 2.375%, a 15-year conventional high-balance ($548,251 to $822,375) at 2%, a 30-year conventional high-balance at 2.5%, and a jumbo 30-year fixed at 2.875%.
Eye catcher loan of the week: A 15-year, fixed at 2.125% without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011