Should You Switch to a 15-Year Mortgage?
As 30-year fixed mortgage rates have hit historical lows, there’s been one less-publicized corollary: 15-year fixed rates are low, too.
Last week’s 15-year rate was at 3.30 percent, down from 3.33 percent the week before.
If you’re a borrower, that’s even more attractive than the 30-year 4.09 percent.
The “spread” between the two rates — in other words, the degree to which taking a 15-year mortgage is cheaper than taking a 30-year mortgage — is 0.75 percentage points. That’s a big differential — historically, about as good as it gets.
Let’s walk through an example to make that discount concrete. If you borrowed $500,000 at 4.09 percent (the current 30-year rate) you’d end up paying $368,713 in interest over the 30-year life of the mortgage. If you borrow $500,000 at 3.30 percent (the current 15-year rate) you’d end up paying $134,591 in interest over the 15-year life of the mortgage. So the faster repayment, if you can swing it, will save you $234,211.
Two hundred thirty-four thousand dollars. That’s a lot of movie tickets.
So, given that 15-year money is “cheap” relative to 30-year money, should you take a 15-year mortgage?
My answer would be, if it’s comfortable, sure.
I would measure “comfort” by a three-part test:
- Will your payments still be manageable?” In the case of our hypothetical $500,000 loan, cutting your mortgage term in half sends your payments up drastically, from $2,413 a month to $3,525. Depending on your income, that $1,100 jump may be just too much to bear.
- Do you need the mortgage-interest tax deduction? Unlike credit-card interest, mortgage interest is tax deductible, which is one of the great tax subsidies of the middle class. (In other words, depending on your tax bracket, your mortgage interest payments provide tax deductions that you can take against your income.) Cutting your interest costs will also cut your tax deductions, so the $234,211 you would save with a shorter mortgage won’t feel like an out-of-pocket number. Use this point to take heart if, like me, you are feeling strapped by housing costs as it is.
- What’s the rest of your financial life look like? A longer-duration mortgage may make more sense if you’re young and plan to keep working for decades than if you’re close to retirement and want to scale back your debt obligations. Similarly, all interest rates are so low that the benefit of cutting your rate marginally is not as big as it would be if rates were higher. (You would have saved even more money cutting the term of your mortgage five years ago, when the differential was less than half what it is today, but long-term rates were six percent). So think about the alternate uses that you would have for the money you can use for mortgage pay down, and consider whether you can get a better yield if you invest in dividend-paying stocks instead.