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What is a 15-year fixed-rate mortgage?
A 15-year fixed-rate mortgage is a home loan with the same interest rate and monthly payment repaid over the course of 15 years. A 15-year fixed-rate mortgage is a good option for borrowers who want to take advantage of lower mortgage interest rates and pay off their mortgages earlier. Plus, the shorter loan term will help you save money in interest compared to a 30-year fixed-rate mortgage (since you’re paying it off sooner).
Advantages of a 15-year fixed mortgage
If you’re considering taking out a 15-year fixed mortgage, there are three core advantages:
Lower interest rates:
Lenders tend to offer lower mortgage interest rates to borrowers who select shorter loan terms, as it poses less risk to the lender. By choosing a 15-year loan, you can qualify for a lower interest rate than if you opted for a 30-year loan.
Reduced repayment amount:
With a shorter loan term and lower interest rate, less interest will accrue on your loan. You’ll repay thousands less in interest over the life of the loan than if you had taken out a 30-year mortgage.
Because you have a shorter loan term and larger monthly payments, more of your minimum monthly payment will go toward the principal, allowing you to build equity in your home more quickly.
What Is a Mortgage Rate and How Do They Work?
Disadvantages of a 15-year fixed mortgage
While a 15-year mortgage allows you to become mortgage-free sooner, there are some drawbacks to consider:
Higher monthly payments:
With a 15-year mortgage, your monthly payments will be significantly higher than they’d be under a 30-year mortgage. The higher payments might be difficult to fit into your budget.
Limited purchase price:
Because so much of your monthly income will go toward the higher minimum mortgage payments, you’ll likely get approved for a smaller home loan with a 15-year mortgage than if you chose a 30-year mortgage. You might have to settle for a smaller and less expensive home if you want to use a 15-year fixed-rate mortgage.
How to shop for a 15-year fixed-rate mortgage
Before selecting a lender, compare offers from multiple mortgage companies to find the best rates and terms for your needs. When researching your options, pay attention to interest rate, interest rate types, fees, and down payment requirements.
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What you need to know when buying a home
Getting pre-approved for a mortgage
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How to buy a house - a step by step guide
There are a lot more steps in the homebuying process than you might think. Review our checklist of steps to buying a house so you don’t forget anything along the way.Learn more
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From not saving enough for a down payment to skipping pre-approval, don’t fall victim to these first-time homebuyer mistakes. Here’s how you can avoid them.Learn more
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As a Credible authority on mortgages, Chris Jennings covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.
Reina Marszalek is Credible's senior mortgage editor and is an experienced multimedia content creator. She previously served as a managing editor at Policy Genius, where she covered the insurance and home verticals.
Mike Schmidt is Credible's senior manager of mortgage operations and is a licensed mortgage loan originator in 50 states. Mike has spent 18 years in the industry, working at various financial institutions. He has expertise in all mortgage products, including conventional, FHA, and VA loans.
The average rate for 15-year fixed rate mortgages has stayed below 3% since the start of the COVID-19 pandemic, according to data from Freddie Mac’s Primary Mortgage Market Survey.
While rates are up slightly, they’re still relatively low when viewed in a historical context. For instance, in 2010, the average annual rate for 15-year fixed loans was 4.10%, and in 1992 — the first full year that Freddie Mac has data for 15-year fixed-rates — the same rate sat at 7.96%.
Market conditions (i.e., supply and demand) contribute to interest-rate fluctuations, but monetary policies implemented by the Federal Reserve are the primary driver. Although the Fed doesn’t set mortgage rates, it does set a federal funds rate, which is the rate banks use to make short-term loans to each other. The federal funds rate, in turn, influences the rates banks charge to loan you money. When the federal funds rate goes up, mortgage rates tend to go up as well.
Low rates encourage borrowing, and borrowing stimulates the economy, so the Fed sets the federal funds rate low when the economy is sluggish. For example, in response to the Great Recession, the Fed reduced the federal funds rate from 5.25% in September 2007 to between 0% and 0.25% in December 2008. The federal funds rate currently sits in that same range as the U.S. economy recovers from the effects of the COVID-19 pandemic.
Here’s a look at how today’s mortgage rate compares to the average annual rate for 15-year fixed mortgages over the last several years:
|Year||Average Annual Rate|
From a lender’s perspective, 30-year mortgages are riskier compared to 15-year mortgages because you pay back principal slower and have more time to run into financial troubles, potentially jeopardizing your ability to pay back the loan.
The longer loan term combined with the higher interest rate means having to pay significantly more in interest over the life of the loan as well. It’ll also take some time before you own your home free and clear.
Despite these drawbacks, many homebuyers still opt for a 30-year home loan vs. a 15-year home loan. With a 30-year mortgage, you get to enjoy a smaller monthly payment along with the flexibility of paying extra toward your mortgage if you so choose. A 30-year mortgage might allow you to buy more home than you otherwise could afford too.
The pandemic era saw the lowest rate ever recorded for a 15-year fixed-rate mortgage: 2.16% for the week ending Jan. 7, 2021. That came 26 years after the all-time high of 8.87% was recorded the week ending Jan. 6, 1995.
The mortgage rates that lenders advertise are based on certain assumptions, such as a specific credit score, loan amount and down payment amount. You’ll need to meet those assumptions to qualify for the lowest rates.
Here are some tips to get the lowest rate possible:
Maximize your credit score: Be sure to pay down all debt and make your payments on time. You might even consider becoming an authorized user on a creditworthy friend’s credit card account to build your credit more effectively.
Avoid very large or very small loans: A loan over the conforming limit of your area (i.e., a jumbo loan) will likely have a higher rate. The interest rate on smaller loans tend to be higher than more traditionally sized loans as well.
Choose a short loan term: In general, the shorter the loan term, the lower the interest rate. Choose the shortest loan term you can afford to get the lowest rate.
Opt for a fixed interest rate: Unless you plan to sell your home before the lower introductory rate on an adjustable-rate mortgage (ARM) ends, your best bet is to go with a fixed loan. This will protect you from any potential rate fluctuations in the future.
Pay points: Paying for mortgage points upfront will reduce your interest rate. Just make sure you’ll live in the home long enough to break even.
A good mortgage rate is one that’s substantially lower than the rates competing lenders are charging for. It’s important to compare at least three different lenders when shopping for a home loan. This will help you get a good rate on a 15-year mortgage, and it could end up saving you thousands of dollars in interest.
From there, consider loan fees to find the balance that results in the best deal. An easy way to do that is to look at the annual percentage rate. The APR is the effective rate you’ll pay inclusive of fees.
Eligibility requirements for a 15-year fixed-rate mortgage might vary slightly by lender, but these are the minimums you’ll generally need to meet to qualify for a conventional loan:
Credit score: Some lenders approve borrowers with credit scores of 620, but you’ll want to have a higher score than that to receive the best rates. Aim for a score in the mid- to high-700s (or higher), as this is widely considered excellent credit. You should also ensure there are no major or recent derogatory entries on your credit report.
Debt-to-income ratio: Lenders prefer a DTI ratio of no more than 36%, but you might be able to qualify with a DTI of 43% or higher. DTI can be tricky with a 15-year term. The higher payment compared to a 30-year loan means you’ll need more income to qualify.
Down payment: To avoid private mortgage insurance, you’ll need to put down at least 20%, but certain borrowers may qualify for a low-down-payment mortgage program, such as Fannie Mae’s HomeReady or Freddie Mac’s Home Possible.
Whether or not you should get a 15-year fixed-rate mortgage depends on several factors, such as your finances and how close you are to retirement. You can also consider an adjustable-rate mortgage with a 15-year term.
A 15-year fixed-rate mortgage might be a good choice if you can afford a higher monthly payment and want your house paid off quickly. You’ll also save far more on interest over the life of the loan than if you were to opt for a longer term.
If you’re nearing retirement age and you want to retire without a mortgage, a shorter 15-year term can help you meet that goal as well. You’re also a good match if you intend to stay in your home for many years.
If you have limited income or other financial goals, the higher payments on a 15-year fixed rate loan may strain your budget. It’s best to avoid any home loan that you cannot comfortably afford.
You may also want to avoid a 15-year mortgage if you’re looking to sell your home within a few years of purchasing it. In this case, consider a 3/1 ARM — or similar — that might offer you a lower rate in the fixed introductory period.
Fifteen-year loans aren’t just for home purchases. You can also use one to refinance your existing mortgage loan.
Refinancing your high-interest-rate mortgage into a new 30-year term might reduce your interest rate, but it would also result in you making mortgage payments for 30 years plus the number of years you put into your original loan. Not only is that potentially an adult lifetime’s worth of mortgage payments, it’s also a lot of extra interest.
A 15-year refinance loan, on the other hand, can get your house paid off faster, saving you on interest in the process. This might allow you to retire debt-free too.
No matter what term you choose, you’ll likely have to pay loan fees and closing costs similar to the ones you paid when you took out your existing mortgage. Run the math to determine whether refinancing into a 15-year term will save you enough in interest to compensate for those fees, especially if you plan to sell before the loan is repaid.
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