Is It Actually a Terrible Time to Get a 15-Year Fixed Mortgage?

September 8, 2016 No Comments »
Is It Actually a Terrible Time to Get a 15-Year Fixed Mortgage?

I’ve seen some articles recently talking about how low 15-year mortgage rates are, and the many benefits of selecting a 15-year fixed vs. a 30-year fixed mortgage.

But it might actually be a not-so-great time to take out a 15-year mortgage…allow me to explain.

At the moment, mortgage rates are close to their all-time lows. For most people, they’re as low as they’ve ever seen them and certainly no one is complaining that they’re too pricey.

Heck, the 30-year fixed is pricing around 3.5% and the 15-year fixed is hovering around 2.75%. It doesn’t take a genius to know these are small numbers.

Great Time to Take Out a Mortgage

That basically tells me (and hopefully you) it’s a great time to have a mortgage. Why? Because interest rates have seldom been lower, and everyone expects them to be much higher sooner rather than later.

And since fixed-rate mortgages allow you to lock-in the rate for the full term of the loan, you can take advantage of today’s low rate for the next three decades.

Alternatively, you can take advantage of today’s rate for the next 15 years.

What I’m getting at here is that you may have a limited time to lock-in an unheard of interest rate for 30 years. Not just 15 years. I use the word “may” because rates keep defying expectations. But that has to end sometime.

So you can enjoy that ridiculous rate for double the amount of time. It’s not just an advantage today, but a benefit for years to come that you can hold onto despite what happens with rates tomorrow.

Now let’s imagine that in five years savings rates are significantly higher (along with mortgage rates). Instead of earning a piddly 1% on your money, you can earn 3% or more.

If you locked in that 15-year fixed at 2.75% you’d actually be “saving” less than if you put that money toward the savings account instead.

And as the savings rate went up you’d lose out even more as you’d have no choice but to dump more of your hard-earned money toward your mortgage at a lower rate of interest.

Conversely, the individual with the 30-year mortgage might have more money to put into savings (instead of their home) every month and could actually make out compared to the homeowner who chose the 15-year mortgage.

But You’ll Never Get a Lower 15-Year Fixed Mortgage Rate

On the other hand, you could argue that it’s always a good time to take out a shorter-term loan. After all, you’ll pay a lot less interest.

We’re talking a ton of money on a mortgage because they’re such large loan amounts relative to anything else.

Additionally, you’ll own your home free and clear that much faster, assuming it’s one of your financial goals. Freedom is good.

And let’s face it, there are plenty of folks out there who don’t do much with their extra cash.

Often it’s sitting in a megabank checking or savings account earning 0.10% APY or something absurdly low. For these homeowners, the 15-year mortgage is going to save them a ton of money without question.

As noted, you’ll probably never see a lower 15-year fixed mortgage rate so why not get it while it lasts?

Ultimately, that decision is yours to make but either way your mortgage rate is probably going to look pretty darn attractive in a few years whichever you choose. You’ll just have one longer.

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