Choosing the right mortgage is an integral part of the home buying process, and there are many options for you to consider. One of which is choosing between a 15-year or 30-year mortgage term. Both of these options have their positives and negatives, which we’ll discuss in this article. What you choose will impact the overall price of your home throughout its lifetime.
What is a Mortgage Term?
The most significant difference between a long and short-term loan is how payments and interest add up over time. Current rates will also impact the affordability of your mortgage interest rate, but 15-year terms are typically less expensive overall because you won’t pay as much interest. For a 30-year mortgage rate, the opposite is true.
When first deciding which term is right for you, think about your budget and income prospects. For example, if you’re borrowing $200,000 towards the purchase of a $600,000 home and choose a 15-year mortgage at a rate of 5.00%, your monthly payments would be $3,163.17 a month. However, you would only pay $169,371 in interest.
If we use the same borrowing amount on the same home but use a 30-year mortgage term at a rate of 5.50%, your monthly payments would be $2,271.16, which is significantly less. However, you would pay a total of $417,616 in interest. That’s 2.4 times as much interest.
When to Choose a 15-Year (Short Term) Mortgage Term
On average, your monthly payments will be higher on a short-term mortgage, but you’ll pay less in interest. When opting for a 15-year term, it’s essential to carefully think about your finances and ensure you can handle the higher monthly cost.
15-year terms work better under a fixed interest rate because you’ll know exactly how much you’ll pay over the loan’s lifetime. If you choose an adjustable-rate, you could run the risk of having a mortgage beyond your means. A percentage or two could add hundreds of dollars to the loan’s monthly payment, so choose the safest route for your term.
Another thing to consider is your job situation. While we can’t predict whether we’ll be laid off or an economic downturn will occur, you can minimize your risk of unemployment by staying in one position long-term. To avoid financial trouble, you could give your lender a higher down payment or opt to save more than spend.
When to Choose a 30-Year (Long Term) Mortgage Term
A 30-year mortgage term is often seen as the safer option because you have a little more wiggle room when it comes to saving. You’ll also receive more in tax benefits because you can claim mortgage deductions longer. Mortgage tax deductions could be beneficial for homeowners that retire while they’re still paying off their loan.
30-year mortgages have the option of prepayment, whereas 15-year terms don’t. You have the opportunity to add an extra $50 to your payments each month which will help you pay down the mortgage faster without straining your budget. Some homeowners on a 30-year term will use bi-weekly payments instead of monthly to shave off as much as they can.
Long-term mortgages are best for families who plan to stay in their homes for an extended period. While you aren’t required to pay down your mortgage before selling, having a plan to stay for 30+ years could also impact which term you choose.
Weighing the Pros and Cons
Before choosing your mortgage term, it’s best to look beyond the financial picture. While a 15-year term will pay off your home faster, you could be sacrificing other financial goals. However, a 30-year term will cost you more in the long-run, but you have the option of paying it down faster and focusing on other investments.
When it comes down to it, choose whichever term works for your budget and lifestyle.
Today’s 30-year mortgage rates start at 2.875% (2.875% APR) according to The Mortgage Reports’ daily rate survey.
However, your own interest rate will likely be different. Actual rates are based on your credit score, down payment, loan type, and other personal factors. Be sure to shop around and find the best deal for you.
Check your 30-year mortgage rates (Feb 17th, 2021)
30-year fixed mortgage rates for February 17, 2021
Program
Mortgage Rate
APR*
Change
Conventional 30 year fixed
2.987%
2.987%
+0.12%
30 year fixed FHA
2.612%
3.591%
+0.12%
30 year fixed VA
2.495%
2.668%
Unchanged
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.
Are 30-year mortgage rates going up or down?
Mortgage rates are staying near historic lows. But they can tick up or down on a daily basis — some days more than others.
These movements can be hard to predict because they’re driven by the broader economy and investors’ interest in buying mortgages.
See how current mortgage interest rates are trending on the 30-year mortgage rates chart below.
Check your 30-year mortgage rates (Feb 17th, 2021)
How a 30-year fixed-rate mortgage works
As its name implies, a 30-year fixed-rate mortgage or ‘FRM’ is repaid over a period of 30 years.
This is the most popular mortgage loan product in the U.S., thanks to a few key benefits:
The interest rate and payment for a 30-year FRM are ‘fixed,’ meaning your rate and monthly payment will never change unless you decide to refinance the loan
A 30-year mortgage has lower monthly payments than a shorter-term loan (like a 15-year FRM) because your loan amount is repaid over a longer time
30-year fixed-rate loans are available for all major loan types (conventional, FHA, and USDA), and from all mainstream lenders
Most home buyers can get a 30-year fixed home loan with a down payment of just 3% or 3.5%. And you don’t need a perfect credit score to qualify.
Thanks to these perks — and today’s low interest rates — 30-year mortgages are an affordable path to homeownership for many.
Check your eligibility for a 30-year mortgage (Feb 17th, 2021)
How do 30-year mortgage rates compare to other loan types?
Today’s 30-year mortgage rates — like all current rates — are lower than they’ve been in most of U.S. history.
Even so, 30-year mortgage rates often look higher than other rates you’ll see advertised.
You can generally find lower mortgage interest rates if you opt for:
A shorter-termloan– Shorter-term home loans (like 10-, 15-, and 20-year FRMs) have lower rates than 30-year FRMs because investors don’t hold the “risk” of carrying your debt for as long. However these loans have much higher payments, since you’re repaying the same amount of money over a shorter time period
An adjustable-rate mortgage – Adjustable-rate mortgages have a fixed interest rate for the first few years. Then, the rate can change with the market. These loans typically offer lower introductory rates (the ones you see advertised) than 30-year loans. But that rate could rise later on, so you lower mortgage payment is not guaranteed to continue
Despite their slightly higher rates, most borrowers opt for a 30-year fixed mortgage over a 15-year FRM or an adjustable-rate mortgage.
The stability and predictability that come with fixed rates and low payments are hard to beat.
Verify your 30-year mortgage eligibility (Feb 17th, 2021)
Compare today’s 30-year mortgage rates
Program
Mortgage Rate
APR*
Change
Conventional 30 year fixed
2.987%
2.987%
+0.12%
Conventional 15 year fixed
2.495%
2.495%
+0.06%
Conventional 5 year ARM
3%
2.743%
Unchanged
30 year fixed FHA
2.612%
3.591%
+0.12%
15 year fixed FHA
2.5%
3.442%
Unchanged
5 year ARM FHA
2.5%
3.207%
Unchanged
30 year fixed VA
2.495%
2.668%
Unchanged
15 year fixed VA
2.25%
2.571%
-0.19%
5 year ARM VA
2.5%
2.386%
Unchanged
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.
Interest rates and APR vary by loan type
30-year mortgage rates also vary by loan program.
If you look at interest rate alone, VA loans typically have the lowest rates, followed by USDA loans.
FHA mortgages also have below-market rates. But they charge expensive mortgage insurance premiums (MIP) which push up the overall cost of the loan.
Similarly, conventional loans with less than 20% down can have expensive private mortgage insurance (PMI). That’s especially true for borrowers with lower credit.
But for borrowers with great credit, PMI is less expensive and won’t have as big of an impact on monthly mortgage payments.
Look at APR as well as mortgage rates
It’s important to look at annual percentage rate (APR) as well as current mortgage rates.
APR estimates the total yearly cost of a home loan, including interest and added costs like mortgage insurance.
So while an FHA loan might appear to have lower rates than a conventional loan, for example, it could have a higher APR and therefore be more expensive overall.
“Jumbo” mortgages (those over Fannie Mae and Freddie Mac limits) are a bit of a special case. Jumbo loan rates can be near or even below conventional loans. But these mortgages are significantly tougher to qualify for.
Find your lowest rate (Feb 17th, 2021)
What about 30-year refinance rates?
Refinancing from one 30-year mortgage to a new one will often lower your monthly payment, provided rates are lower than when you first got your loan. That’s because in most cases you’re lowering the interest rate and spreading your loan repayment over a longer time period.
However, you have to be careful when refinancing into a new 30-year home loan.
By restarting your mortgage with a new 30-year term, you increase the amount of time you’re paying interest.
If you’ve had the loan a long time — or your new interest rate is not low enough to negate the time difference — you could actually end up paying more in interest in the long run.
For homeowners with only 15 or 20 years left on their original loan, it might make sense to refinance into a shorter loan term. This could help you secure a lower interest rate and pay your home off on schedule (or at least, close to it).
How your interest rate is determined
In large part, mortgage rates are determined by the economy and overall interest rate market.
Mortgage rates move up or down depending on how much investors will pay for mortgage bonds (“mortgage-backed securities”) in a secondary market. The economy is a big factor in that.
During scary economic times, interest rates tend to be low. But they go up when things are looking positive.
On top of that, lenders adjust your rate based on how “risky” you appear as a borrower.
Less risk to the lender means a lower interest rate for you. More risk, and your rates go up.
Mortgage lenders determine risk and set mortgage rates based on a wide range of factors, including your:
Credit score and credit report
Debt-to-income ratio (DTI)
Down payment
Loan-to-value ratio
Total assets/cash reserves
Employment history and continuing income
If you’re very secure financially, you could be a “top-tier borrower,” meaning you qualify for the very lowest 30-year mortgage rates. The further away you are from that happy situation, the higher interest rate you’re likely to pay.
Tips to get the lowest mortgage rate
To get the best rate possible, it helps to get your finances ship-shape before applying for a mortgage.
For example, managing debts well and keeping your credit score up can help you qualify for a lower interest rate. As can savings for a bigger down payment.
Don’t worry. Nobody’s expecting miracles. But small improvements can make a worthwhile difference in the mortgage rate you’re offered.
Here are some quick hits:
Keep paying all your bills on time
Pay down your card balances as much as possible. That helps your credit score and DTI
Beef up your savings
Don’t open or close credit accounts unnecessarily. That lowers your credit score
Consider buying discount points on your mortgage. Discount points add to your upfront cost, but lower. Your interest rate and long-term cost
Few of us can afford to boost our savings and pay down our debts at the same time. So focus on areas where you think you can make the biggest difference. You’ll see the biggest improvement in your credit scores by paying down high-interest, revolving credit accounts such as credit cards.
The other big way to lower your interest rate is by shopping around.
Mortgage lenders have flexibility with the rates they offer. Some will offer you lower rates than others because they’re more favorable toward your particular situation.
By simply comparing rates from 3-5 lenders before you buy, you can save hundreds — maybe thousands — on your overall mortgage costs.
Find your lowest 30-year mortgage rate (Feb 17th, 2021)
Is a 30-year fixed-rate mortgage best for you?
There’s a reason 30-year loans are so popular for buying and refinancing real estate. They’re very good and typically are the best loans for most people. But who are the exceptions?
Home buyers with a lot of monthly income
If you have plenty of cash left over every month, you may be able to afford the higher payments that come with a shorter-term mortgage.
Opting for a shorter term could save you a bundle, because it means you pay less interest.
Instead of borrowing over 30 years, you’d be borrowing for 20, 15, 10 or even fewer. And the less time you pay interest, the more you save.
The same benefits apply when refinancing to a 15-year term instead of a new 30-year term.
Intrigued? Run your figures through The Mortgage Reports mortgage calculator.
You’ll notice the payments for a 15-year loan are much higher. But you may be shocked by how much interest you’d save.
Someone moving in less than 10 years
A 30-year term with a fixed rate buys you security and predictability over three decades. But suppose you don’t need all that time, because you know you’ll be moving on in ten years or fewer.
In this case, you might be better off with an adjustable-rate mortgage (ARM).
Adjustable-rate mortgages typically come in 3 forms: the 5/1, 7/1, and 10/1 ARM. All have 30-year terms, but the first number (5, 7, or 10) refers to the amount of time your interest rate is fixed.
If you’re certain you’ll be moving before that fixed-rate period ends, you could opt for an ARM and enjoy the introductory rate it offers — which is usually significantly lower than 30-year mortgage rates.
Find the right type of mortgage for you (Feb 17th, 2021)
30-year mortgage rates FAQ
What is the average 30-year fixed mortgage rate?
Average 30-year mortgage rates change daily — sometimes more than once a day. For today’s average, see the tables above.
Historically, 30-year mortgage rates have averaged around 8%. But they’ve been well below that in recent years, with average 30-year rates in 2016, 2017, 2019, and 2020 all coming in below 4%.
What is the lowest 30-year mortgage rate ever?
At the time of writing, the lowest 30-year mortgage rate ever was 2.66% (according to Freddie Mac’s weekly rate survey). That number may have changed since. And remember the “lowest-ever” is an average rate. Top-tier borrowers with excellent credit and large down payments or who pay points get rates below even those.
How does a 30-year mortgage work?
A 30-year, fixed-rate mortgage lets you repay your home loan balance over three decades. During that time period, your interest rate and monthly payments are fixed — so they always stay the same (unless you refinance). Opting for a 30-year FRM does not mean you need to keep the home all 30 years. You’re generally free to sell the home or refinance into a different loan at any time.
Is it better to have a 20- or 30-year mortgage?
It’s generally best to have the shortest mortgage you can comfortably afford to maintain. That’s how you pay the least interest on your loan.
Some financial planners argue that you’re better off with a longer mortgage, providing you invest the money saved on monthly payments into something providing high returns. However, high returns invariably come with high risks. And you’ll likely decide based on your personal tolerance for risk rather than a fancy spreadsheet.
Are 30-year mortgage rates going up or down?
On a macro level, 30-year mortgage rates have generally been going down for the past 40 years, with some brief periods where they rose. In 2020, the coronavirus pandemic pushed rates to new record lows multiple times.
On a micro level, mortgage rates can change daily. When you’re shopping for a mortgage, you can keep an eye on the news and try to time your rate lock for a day when mortgage rates go down.
But overall your finances — credit, down payment, and debts — will have a much bigger impact on your rate than trying to time the market.
What are 30-year mortgage rates tied to?
Mortgage rates are tied to the price of mortgage-backed securities or MBS. These are bundles of mortgages sold on a secondary market. Most lenders sell their mortgages there soon after closing to free up cash and be able to make more loans.
How much investors will pay for MBS depends largely on how the economy’s doing. When it’s strong, they can get a better return on the stock market and other higher-risk investments. That pushes MBS prices lower and mortgage rates higher.
When investors are worried about the economy, they want to buy safer investments to balance the risk in their investment portfolios. And US Treasuries and MBSs are favorites. That extra demand pushes up the price of MBSs and sends mortgage rates lower.
Which lender has the best 30-year mortgage rates?
Mortgage rates can vary a lot from one lender to the next. They all use different formulas to determine a borrower’s ‘risk’ and set rates accordingly. Lenders may also adjust rates depending on their current workload and desire for new loans.
This means there’s no single lender with the “lowest” rates. That can vary from day to day and from one borrower to the next.
To find the lender with the best rates for you, shop around. Compare rates and fees from at least 3-5 lenders, and choose the one with the lowest overall cost for you.
See the latest mortgage and refinance rates for Tuesday, December 29 »
Mortgage and refinance rates haven’t budged much since last Monday, but they’ve trended downward since this time last month.
If you want to buy a home soon, you may want to choose a fixed-rate mortgage over an adjustable-rate mortgage.
Mat Ishbia, CEO of United Wholesale Mortgage, told Business Insider there isn’t much of a reason to choose an ARM over a fixed rate these days.
ARM rates used to start lower than fixed rates for the first few years, and there was a chance your rate could decrease later. But fixed rates are lower than adjustable rates right now, so you probably want to lock in a low rate while you can.
Rates from the Federal Reserve Bank of St. Louis.
Some mortgage rates have decreased slightly since last Monday, and they have all decreased since last month.
Overall, mortgage rates are at historic lows. The downward trend becomes more obvious when you look at rates from 6 months or a year ago:
Rates from the Federal Reserve Bank of St. Louis.
Lower rates typically signal a struggling economy. As the US economy continues to grapple with the coronavirus pandemic, rates will probably stay low.
Rates from Bankrate.
Refinance rates haven’t changed much since last Monday, but they’ve decreased across the board since this time last month.
With a 30-year fixed mortgage, you’ll pay off your loan over 30 years, and your rate stays locked in for the entire time.
The 30-year fixed rates are higher than 15-year fixed or 5/1 ARMs. Your monthly payments will be lower compared to the other types of loans, because your principal is spread out over a longer period of time.
But you’ll pay more in interest because a) the rate is higher, and b) your interest is also spread out over a longer period of time.
With a 15-year fixed mortgage, you’ll pay down your loan over 15 years and pay the same rate the whole time.
A 15-year fixed rate will be lower than a 30-year mortgage rate. Monthly payments will likely be higher, because you’re paying off the principal in half the time.
You’ll save money in the long run, though, since you won’t be paying for as long and the rate is lower.
A 10-year fixed-rate mortgage isn’t very common for an initial mortgage. But you might refinance into a 10-year mortgage after you’ve paid down some of your loan.
Rates are similar to what you’ll pay for a 15-year fixed-rate mortgage, but you’ll pay off your loan five years earlier.
With an adjustable-rate loan, your rate stays the same for the first few years, then changes periodically. Your rate is locked in for the first five years on a 5/1 ARM, then your rate increases or decreases once per year.
ARM rates are at all-time lows right now, but a fixed-rate mortgage is still the better deal. The 30-year fixed rates are comparable to or lower than ARM rates. It could be in your best interest to lock in a low rate with a 30-year or 15-year fixed-rate mortgage rather than risk your rate increasing later with an ARM.
If you’re considering an ARM, you should still ask your lender about what your individual rates would be if you chose a fixed-rate versus adjustable-rate mortgage.
It could be a good day apply for a mortgage, but you probably won’t miss out on low rates if you aren’t quite ready to buy a home yet,
Mortgage and refinance rates should stay low well into 2021 — if not longer — so you’ll likely have time to improve your finances if necessary. Lenders usually offer better rates to people with stronger financial profiles.
Here are some tips for snagging a low mortgage rate:
Increase your credit score. Making all your payments on time is the biggest factor in improving your score, but you should also work on paying down debts and letting your credit age. You may want to request a copy of your credit report to review your report for any errors.
Save more for a down payment. Depending on which type of mortgage you get, you may not even need a down payment to get a loan. But lenders typically offer you a better rate when you have a bigger down payment. Because rates should stay low for a while, you probably have time to save more.
Improve your debt-to-income ratio. Your DTI ratio is the amount you pay toward debts each month, divided by your gross monthly income. Many lenders want to see a DTI ratio of 36% or less, but the lower your ratio, the better your rate will be. To lower your ratio, pay down debts or consider opportunities to increase your income.
If your finances are in a good place, you could land a low mortgage rate right now. But if not, you have plenty of time to make improvements to get a better rate.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.
More Mortgage Coverage
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The seesaw nature of mortgage applications continued for the week ending Feb. 5, as applications decreased 4.1% from the prior week, according to the latest data from the Mortgage Bankers Association.
Applications were up 8.5% the week ending Jan. 29 – breaking a two-week stretch of decreases – before falling again last week.
Mortgage rates have increased in four of the six weeks of 2021, according to Joel Kan, MBA’s associate vice president of economic and industry forecasting, which could be causing the dip in applications.
“Jumbo rates [were] the only loan type that saw a decline last week,” Kan said. “Despite some weekly volatility, Treasury rates have been driven higher by expectations of faster economic growth as the COVID-19 vaccine rollout continues.”
The refinance index decreased 4% from the previous week but was still 46% higher year-over-year. The seasonally adjusted purchase index also decreased from one week earlier – down 5% – though the unadjusted purchase Index increased 2% compared with the prior week and was 17% higher than the same week in 2020.
The 30-year fixed mortgage rate increased to 2.96% – a high not seen since November 2020, Kan said. This has led to an uptick in refinancing, he said, as borrowers race to lock in a rate below 3%.
“Government refinance applications did buck the trend and increase, and overall activity was still 46% higher than a year ago,” he said. “Demand for refinances is still very strong this winter. Homebuyers are still very active.”
The higher-priced segment of the market continues to perform well, Kan said, with the average purchase loan sizes increasing to a survey-high of $402,200.
The FHA share of total mortgage applications increased to 9.5% from 9.1% the week prior. The VA share of total mortgage applications increased to 13.3% from 12.1% the week prior.
Here is a more detailed breakdown of this week’s mortgage application data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 2.96% from 2.92%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) decreased to 3.11% from 3.12% – the third week in a row of decreases
The average contract interest rate for 30-year fixed-rate mortgages increased to 2.97% from 2.94%
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.50% from 2.44%
The average contract interest rate for 5/1 ARMs increased to 2.92% from 2.88%
Mortgage applications jumped 8.15% from the week ending Jan. 29, breaking a two-week streak of decreases, according to the latest data from the Mortgage Bankers Association.
The refinance index also increased 11% from the previous week – up to its highest level since March 2020 – and was 59% higher year-over-year. The seasonally adjusted purchase index increased 0.1% from one week earlier, though the unadjusted purchase Index increased 8 percent compared with the prior week and was 16 percent higher than the same week in 2020.
The 30-year fixed mortgage rate did see a slight drop, down to 2.92% after hitting a three-month high last week of 2.95%.
Historically low mortgage rates became the norm in 2020 due to the COVID-19 pandemic and economic recession. As rates begin to creep up closer to 3% in recent weeks, the number mortgage applications had begun to slip before last week’s jump.
Still, rates are low enough to appeal to homebuyers, noted Joel Kan, the MBA’s associate vice president of economic and industry forecasting.
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“The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates,” Kan said. “Average purchase loan amounts in early 2021 continue to rise across all loan types, driven by a strong pace of home sales, tight housing inventory and high home- price growth.”
The FHA share of total mortgage applications decreased to 9.1% from 9.4% the week prior. The VA share of total mortgage applications decreased to 12.1% from 12.4% the week prior.
Here is a more detailed breakdown of this week’s mortgage application data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.92% from 2.95%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $510,400) decreased to 3.12% from 3.17% – the second week in a row of decreases
The average contract interest rate for 30-year fixed-rate mortgages decreased to 2.94% from 2.88%
The average contract interest rate for 15-year fixed-rate mortgages decreased to 2.44% from 2.43%
The average contract interest rate for 5/1 ARMs decreased to 2.88% from 2.60%
30-year mortgage rates chart: Where are rates now?
If you look at a 30-year mortgage rate chart, there’s a trend you
can’t miss: Today’s
rates are low.
Really low.
But remember, these are just averages. Your mortgage rate might be higher or lower than the ‘typical’ borrower.
Check your mortgage rates today (Jan 30th, 2021)
In this article (Skip to…)
Mortgage rate trends chart: Where are rates
headed?
The coronavirus pandemic pushed mortgage rates to rock
bottom, and most experts think they can’t go down much further.
If anything, mortgage rates are likely to go up in the
coming months and years, as COVID recovery progresses and the economy begins to
improve.
Borrowers shouldn’t expect dramatic rate spikes.
But unlike 2020, when mortgage rates hit record lows over and over, we’re likely to see more upward movement for 30-year mortgage rates and other home financing rates.
Those who are ready to buy a home or refinance now
shouldn’t wait on rates to fall; it’s not likely to happen.
But if your home buying or refinancing plans are further
down the road, you shouldn’t worry about any huge rate increases in the near
future. Affordable financing is here for the long haul.
Verify your new rate (Jan 30th, 2021)
Average 30-year mortgage rates since 1972
For some perspective on today’s mortgage interest rates,
here’s how 30-year rates have changed from year to year over the past four
decades.
Year
Average 30-Year Rate
Year
Average 30-Year Rate
Year
Average 30-Year Rate
1972
7.38%
1988
10.34%
2004
5.84%
1973
8.04%
1989
10.32%
2005
5.87%
1974
9.19%
1990
10.13%
2006
6.41%
1975
9.05%
1991
9.25%
2007
6.34%
1976
8.87%
1992
8.39%
2008
6.03%
1977
8.85%
1993
7.31%
2009
5.04%
1978
9.64%
1994
8.38%
2010
4.69%
1979
11.20%
1995
7.93%
2011
4.45%
1980
13.74%
1996
7.81%
2012
3.66%
1981
16.63%
1997
7.60%
2013
3.98%
1982
16.04%
1998
6.94%
2014
4.17%
1983
13.24%
1999
7.44%
2015
3.85%
1984
13.88%
2000
8.05%
2016
3.65%
1985
12.43%
2001
6.97%
2017
3.99%
1986
10.19%
2002
6.54%
2018
4.54%
1987
10.21%
2003
5.83%
2019
3.94%
Can 30-year mortgage rates go lower?
The short answer is that
mortgage rates can always go lower. But you shouldn’t expect them to.
Mortgage rates operate in
their own market. Lenders have control over the rates they set, and many are
content to keep rates (and profit margins) a little higher.
This helps stem the tide of
home buyers and refinancers and keep their workload manageable.
In addition, mortgage rates
have to answer to end investors.
When rates fall too rapidly, investors start paying less for mortgage-backed securities (MBS) — the financial instruments that drive mortgage rates.
This is because investors assume homeowners will refinance, paying off their loans faster and reducing the returns on interest.
Less money from investors,
in turn, means lenders have to keep their rates a little higher, or charge
borrowers bigger fees for lower rates.
So don’t expect mortgage
rates to keep falling in lock-step with the rest of the market.
They could push lower, but
they’re just as likely to stay stagnant. And sooner or later, they’re bound to
rise again.
Verify your new rate (Jan 30th, 2021)
Historical perspective: Banner years for mortgage interest rates
The long-term average for mortgage rates is about 8%. That’s according to Freddie Mac records going back to 1971.
But mortgage rates can move
a lot from year to year — even from day to day. And some years have seen much
bigger moves than others.
Here’s a look at just a
few, to show how rates often buck conventional wisdom and move in unexpected
ways.
1981 — The all-time high
1981 was the worst year for mortgage interest rates on
record.
How bad is bad? The average
mortgage rate in 1981 was 16.63%.
At 16.63% a $200,000
mortgage has a monthly cost for principal and interest of $2,800
Compared with the long-time
average that’s an extra monthly cost of $1,300 or $15,900 per year
And that’s just the average – some people paid more.
For the week of Oct. 9, 1981, mortgage rates averaged 18.63%, the highest weekly rate on record, and almost five times the 2019 annual rate.
2008 — The slump
2008 was the final gasp of the mortgage meltdown.
Real estate financing was
available in 2008 for 6.03% according to Freddie Mac.
The monthly cost for a
$200,000 mortgage was about $1,200 per month, not including taxes and insurance
Post 2008, rates declined
steadily.
2016 —An all-time low
2016 held the lowest annual
mortgage rate on record going back to 1971. Freddie Mac says the typical 2016
mortgage was priced at just 3.65%.
A $200,000 mortgage at
3.65% has a monthly cost for principal and interest of $915
That’s $553 a month less
than the long-term average
Mortgage rates had dropped lower in 2012, when one week in November
averaged 3.31%. But some of 2012 was higher, and the entire year averaged out
at 3.66% for a 30-year mortgage.
2019 — The surprise drop-off
In 2018, many economists
predicted that 2019 mortgage rates would top 5.5%. That turned out to be wrong.
In fact, rates dropped in 2019. The
average mortgage rate went from 4.54% in 2018 to 3.94% in 2019.
At 3.94% the monthly cost for a $200,000 home loan was $948
That’s a savings of $520 a month – or $6,240 a year – when
compared with the 8% long-term average
In 2019, it was thought
mortgage rates couldn’t go much lower. But 2020 proved that thinking wrong
again.
2021 — The lowest 30-year mortgage rates ever
Rates plummeted in 2020 in response
to the coronavirus pandemic.
By July 2020, the 30-year fixed rate fell below 3% for the first time — and it kept falling to a new record low (in January 2021) of 2.65% for a 30-year fixed-rate mortgage.
At 2.65% the monthly cost for a $200,000 home loan is $806 a month not counting taxes and insurance
You’d save $662 a month, or $7,900 a year — compared to the 8% long-term average
Due to the Federal Reserve’s promise of low interest rates post-COVID, mortgage rates are expected to stay low for years.
But as we’ve seen in the past, predictions about mortgage
rates are often wrong.
That’s why when rates are good, experts recommend locking one in instead of waiting for potentially lower rates in weeks or months.
Factors that affect your mortgage
interest rate
For the
average homebuyer, tracking mortgage rates helps reveal trends. But not every
borrower will benefit equally from today’s low mortgage rates.
Home
loans are personalized to the borrower. Your credit score, down payment, loan
type, loan term, and loan amount will affect your mortgage or refinance rate.
It’s
also possible to negotiate mortgage rates. Discount points can provide a lower
interest rate in exchange for paying cash upfront.
Let’s
look at some of these factors individually:
Credit
Score
A credit
score above 620 will open more doors for lower interest rate loans, though some
loan programs such as USDA, FHA, and VA loans can be available to sub-600
borrowers.
If
possible, give yourself a few months or even a year to improve your credit
score before borrowing. You could save thousands of dollars through the life of
the loan.
Down
Payment
Higher
down payments can shave your borrowing rate.
Most
mortgages, including FHA loans, require at least 3% or 3.5% down. And VA
loans and USDA loans are available with 0% down payment.
But if
you can put 10%, 15%, or even 20% down, you might qualify for a conventional
loan with low or no mortgage insurance and seriously reduce your housing costs.
Loan
Type
The type
of mortgage loan you use will affect you interest rate. However, your loan type
hinges on your credit score. So these two factors are very intertwined.
For
example, with a credit score of 580 you may qualify only for a subsidized loan
such as an FHA mortgage. FHA loans have low interest rates, but come with
mortgage insurance no matter how much money you put down.
A credit
score of 620 or higher might qualify you for a conventional loan, and —
depending on your down payment and other factors — potentially a lower rate.
Adjustable-rate mortgages traditionally offer lower introductory interest rates compared to a 30-year fixed-rate mortgage. However, those rates are subject to change after the initial fixed-rate period.
So an
initially lower ARM rate could rise substantially after 5, 7, or 10 years.
Loan
Term
In this
post we’ve tracked rates for 30-year fixed-rate mortgages, but 15-year
fixed-rate mortgages tend to have even lower borrowing rates.
With a
15-year mortgage, you’d have a higher monthly payment because of the shorter
loan term. But throughout the life of the loan you’d save a lot in interest
charges.
At a 3% interest
rate for a $200,000 home loan, you’d pay $103,000 in interest charges with a
30-year mortgage paid off on schedule. A 15-year fixed-rate mortgage would cost
only about $49,000 in interest.
Loan
Amount
Rates on
unusually small mortgages — a $50,000 home loan, for example — tend to be
higher than average rates because these loans are less profitable to the lender.
Rates on
a jumbo mortgage loan tend to be higher, too, because lenders have a higher
risk of loss. Jumbo loans help shoppers buy high-value real estate.
Discount
Points
A
discount point can lower interest rates by 0.25% in exchange for upfront cash.
A discount point costs 1% of the home loan amount.
For a
$200,000 loan, a discount point would cost $2,000 upfront. However, the
borrower would recoup the upfront cost over time thanks to the savings earned
by a lower interest rate.
Since
interest payments play out over time, a buyer who plans to sell the home or
refinance within a couple years should probably skip the discount points and
pay a higher interest rate for a while.
Some rate quotes assume the home buyer will buy discount points, so be sure to check before closing on the loan.
Understanding your monthly
mortgage payment
In this
article, we compare monthly payments for a $200,000 home loan at a variety of
interest rates.
Understand
that these examples show only principal and interest — the amount you’re paying
each month toward your loan balance and interest generated.
Overall, your monthly mortgage
payment will be higher than just principal and interest. That’s because there
are other costs bundled in, including:
Property taxes —City and county governments levy annual property taxes to pay for public services. These taxes are usually prorated over 12 months and paid to your loan servicer along with your mortgage payment
Homeowners insurance — Homeowners insurance premiums average about $1,000 a year. As with property taxes, homeowners insurance premiums can be spread out over 12 months and paid with your mortgage via an escrow account
HOA fees — Condos, apartments, and gated communities may charge annual Homeowners Association fees which can be broken down into monthly payments added to the mortgage
Mortgage insurance — FHA loans, USDA loans, and conventional loans with less than 20% down payment require the borrower to pay for mortgage insurance. Mortgage insurance costs around 1% of the loan amount each year, although rates vary depending on the loan type and down payment. For a $200,000 loan that would equal $2,000 a year or $166 per month added to the mortgage payment
Collectively,
it’s not unusual for taxes, fees, and premiums to add several hundred dollars
to a monthly mortgage payment.
Closing costs affect the cost
of borrowing, too
Interest
rates have a huge impact on borrowing costs throughout the life of a mortgage
loan, but it’s important not to forget the cost of upfront fees, too.
Closing costs typically add anywhere from 2% to 5% of your loan amount. Closing costs include loan origination fees, discount points, legal fees, appraisal fees, title fees, and more.
Many
first time home buyers don’t know they can negotiate some closing costs such as
the lender’s origination fee. However, many costs are pre-set by third parties
such as attorneys and appraisers.
In some
mortgage markets the home seller will help with closing costs. But it’s up to
the buyer to negotiate this part of the transaction. A Realtor can help.
When
choosing a mortgage, home buyers and refinancers should always consider closing
costs along with interest rates.
Determine your buying power with
a mortgage calculator
The
charts and graphs on this page show the way 30-year fixed-rate mortgages have
changed over time and continue to change.
To see how today’s mortgage rates affect your borrowing power, use our mortgage calculator that includes PMI and other added costs.
Today’s
historically low interest rates have increased buying power by lowering monthly
payments for borrowers throughout the spectrum.
When to lock your mortgage rate
Keep an eye on daily rate
changes. But if you get a good mortgage rate quote today, don’t hesitate to
lock it in.
Remember, if you can secure
a 30-year mortgage rate below
3% or 4%, you’re paying less than half as much as most American
homebuyers in recent history. That’s not a bad deal.
Want to make sure your home grows in value? Then buy a house in the South. According to new analysis, that’s where home values will appreciate the most in 2020.
Verify your new rate (Jan 28th, 2021)
Your safest bets for high home values
According to the Home Price Expectations Survey from Zillow, which takes into account expert analysis from 100 economists and real estate experts, housing will be hottest in the South this year.
At the city level, experts say Austin, Texas, will see the most home value appreciation in 2020. A whopping 83% of those surveyed expect the city to outperform national averages this year.
Cost gap shrinks between buying a home and renting one
Other cities where home values are expected to outperform include Atlanta (63%); Charlotte, N.C. (59%); Nashville, Tenn. (59%); and Denver (55%).
“A collection of relatively affordable, Sun Belt markets are among those in which home value growth in 2020 is most expected to outperform the national average,” explains Skylar Olsen, Zillow’s director of economic research. “Of the 14 markets that received a positive score — a higher share of panelists said they expected the market to outperform than underperform, 11 were in Texas or elsewhere in the Southwest or Southeast. Portland, Minneapolis, and Denver were the only non-Southern markets to make the list of those expected to outperform.”
Where home values won’t do so great
If you’re looking for high home value appreciation, California probably isn’t your best bet. Three Cali cities topped experts’ “most likely to underperform” lists, including San Francisco, San Jose, and Los Angeles.
“Panelists didn’t just expect those large California markets to underperform, but maybe still grow slightly. In many cases, they said they expected the typical home values in those places to outright fall, ending 2020 lower than where they began the year,” Olsen says. “Panelists — 42 total — who thought at least one major metro would see falling home values in 2020 generally agreed that California markets would make that list.”
How low can we go? 30-year mortgage rate chart tells a story
Cincinnati also ranked among the top, with 46% of experts saying its home value appreciation rate would come in under national averages. Seattle came in with 40%.
Verify your new rate (Jan 28th, 2021)
Get today’s mortgage rates
Want to buy a house where home values are on the rise? Shop around and see what mortgage rates you qualify for today.
The start of the year saw another drop in mortgage rates, with the average 30-year fixed rate falling to 2.65% — its lowest low ever, according to Freddie Mac.
But then interest rates reversed.
The average 30-year mortgage rate spiked to 2.79% on January 14, per Freddie Mac’s survey. Other sources reported averages as high as 2.88% on the same day.
Experts predict rates will keep on climbing in 2021.
The change should be modest — with 30-year rates in the mid-3% range, at worst — but the heyday of new record lows every week could be ending.
Check your mortgage rates today (Jan 26th, 2021)
Just how much did mortgage rates rise?
There’s no question mortgage interest rates are ticking up. But how much they’ve increased depends on who you ask.
Freddie Mac, the industry’s go-to for current mortgage rates, reports a relatively modest spike of 0.14%. It also showed rates pushing downward until last week.
But other sources paint a different picture.
Mortgage News Daily, for one, was already reporting 30-year rates at 2.86% on the same day Freddie listed its lowest-low of 2.65%.
So which source is right? Both of them are, in a way.
Differences in rate reporting are common due to companies’ different survey practices. They can also vary based on whether the source looks at purchase or refinance mortgages.
Remember that in the third quarter of 2020, the Federal Housing Finance Agency (FHFA) instituted an Adverse Market Refinance Fee of $500 per $100,000 borrowed — which has led to higher rates on most refinance loans.
The other thing to keep in mind is that rates in the news are averages. That means borrowers with good credentials can often still get lower rates than what’s shown.
So even though interest rates have ticked up, the ultra-lows of the last few weeks aren’t completely gone.
Check your mortgage rates (Jan 26th, 2021)
Why are mortgage rates going up?
The short answer is that mortgage rates are going up because the economy is starting to have a more positive outlook on post-COVID recovery.
Coronavirus has been the major force keeping rates low over the past year. The closer we get to widespread vaccination — and the better our economic outlook as a result — the higher rates will go.
Although the U.S. is still at a critical stage with the virus, and far from tangible recovery, we’re finally starting to see a path forward.
This is largely due to Biden’s win, as well as the Georgia runoff election in which Democrats Raphael Warnock and Jon Ossoff won Senate seats.
The impact of Biden and Senate Democrat wins
Current mortgage rate movements are due partly to the fluidity of the political and economic situation in the U.S., as the country prepares for a transition from the Trump administration to the Biden White House on January 20.
President-Elect Joe Biden has signaled that he wants to implement a $1.9 trillion stimulus plan to jumpstart the economy, and the Democratic wins in Georgia give him a Senate majority that will likely aid his efforts.
Although Biden’s proposed stimulus plan has drawn criticism that relief checks of even $2,000 are unlikely to do much for the economy, the aim of the plan is to ease the country’s economic burden and spur spending and growth.
Economic growth would likely raise mortgage rates as different sectors rebound.
Mortgage Professional America Magazine also reported that stimulus spending could increase inflation, which would drive up mortgage rates as well.
Keeping an eye on the 10-Year Treasury
Eli Sklar, senior loan consultant with loanDepot, pointed to the Ten-Year Treasury as an indicator of an improving economy and a signal that rates will rise in the coming year.
“The Ten-Year Treasury’s price, which is a big indicator of mortgage rates, is inversely related to how the market is doing. As the market continues to do well, the Ten-Year Treasury’s value goes down because the Ten-Year Treasury is known as the safest investment,” Sklar said.
A spike in investor interest in the Ten-Year Treasury as the economy cratered last year, combined with the Federal Reserve’s commitment to keep interest rates low, drove down mortgage rates.
But, Sklar said, as the economy recovers and people regain confidence in other types of investments, the Ten-Year Treasury will decline and mortgage rates will rise once again.
Verify your new rate (Jan 26th, 2021)
How high will mortgage rates go in 2021?
Mortgage rates could continue to rise this year, particularly if the newly elected President Biden is able to enact a relief package that includes direct payments to taxpayers and other stimulus measures.
However, major housing agencies predict only a modest rise throuhout 2021, with 30-year mortgage rates staying in the high 2% or low 3% range on average.
Agency
30-Yr Rate Prediction
Fannie Mae
2.80%
Wells Fargo
2.89%
Freddie Mac
3.00%
National Assoc. of Home Builders
3.00%
National Assoc. of Realtors
3.20%
Mortgage Bankers Assoc.
3.30%
Average of all agencies
3.03%
As long as the pandemic forces the closure or reduced hours of businesses and strains the economy, it’s unlikely that mortgage rates will rise substantially.
Even with widespread vaccine access, a recovery for individuals who suffered job losses or reduced hours, not to mention hard-hit small businesses, won’t happen overnight.
“I do think it’s going to get better, but I think it’s worse than people think,” said Jarred Kessler, CEO of EasyKnock, a company that allows people to tap the equity in their homes through a sale-leaseback program.
Kessler says a slow but steady recovery as the service industry resurges and businesses and individuals get back on their feet “will be correlated with [rising] interest rates.”
As long as COVID strains the economy, it’s unlikely mortgage rates will rise substantially.
“I think we’re going to stay in a low interest rate environment for definitely the next two years,” Kessler said.
Once the economy does begin to recover more consistently, however, increased yields on Treasury and other bonds will nudge interest rates higher as well, MarketWatch reports.
Rates could also rise if the federal government stops, or at least eases, its pandemic policy of buying unlimited mortgage-backed securities.
If the economy begins steadily improving, the Federal Reserve may begin tapering those purchases, which could impact rates. However, Kessler said a formal announcement about a policy change seems unlikely in the immediate future.
“It’s a Catch-22. If you do it, rates are going to go up and the Fed might be forced to backtrack a little bit,” Kessler said. “I think things are too fragile right now.”
The bottom line is that although rates may rise somewhat in the coming months, the Federal Reserve projects that they will stay at historically low numbers through at least 2023.
COVID vaccines will set the tone for mortgage interest rates
As a COVID-19 vaccine becomes more widely available, rates could also rise.
In theory, as more people get the vaccine and are able to safely eat at restaurants and attend large events, the economy will regain some of the momentum lost during the pandemic.
However, a full recovery will take time, particularly if many opt not to get the vaccine due to fear of side effects.
The Pew Research Center found that as of December, 60% of Americans surveyed said they would likely take the vaccine once it became available to them. But 21% expressed misgivings about the vaccine and said they would probably not get it, even once more information became available about it.
Although the percentage of people who need to be vaccinated in order to achieve herd immunity to COVID-19 is not yet known, according to the World Health Organization, it typically must be significantly higher than 60%.
While vaccine numbers and herd immunity might seem far removed from mortgage rates, they’re actually closely linked.
Remember that a weak economy means low mortgage rates, because investors pour money into the safe haven of mortgage-backed securities (MBS). This pushes rates down.
As the economy improves, which will gradually happen with widespread vaccination, investors will turn elsewhere and mortgage rates will once again increase.
Should I try to buy a house while rates are low?
Buying a home is something you should decide based on your finances rather than what’s happening in the market.
As Kessler puts it, “I think you’re nuts if you’re trying to time it” for when mortgage rates are at record lows.
“You’re in an unprecedented period of time where you can borrow for pretty much nothing right now. If you want to buy a home, don’t buy a home for a one-year trade. You should be thinking five, 10 years out,” he said.
It’s best to consider your credit score, savings, and the local real estate market, and make a decision based on those factors rather than the broader market.
Even if you wait to buy a home until your finances improve, you’re still looking at historically low mortgage rates.
Even if you wait to buy until you’re in a better financial position and rates increase by then, you’re still looking at historic lows, Sklar said.
The important thing is to make sure you can afford your payments on the home you want, and to take a long-term view of what you’re paying.
Sklar also noted that buyers should keep in mind that purchasing in a low-rate environment isn’t the only way to save on interest. You can also buy down your rate by paying discount points when you close on the home to reduce the amount of interest you’ll pay.
Establishing good credit, keeping non-mortgage debts low, and saving up for a larger down payment can also help you qualify for a competitive rate.
Should I rush to lock a refinance rate?
Sklar said he advises clients against trying to “time” the market or waiting to lock in a rate in the hopes that it might go a little bit lower.
“Do I expect it to go to zero? It’s not going to happen,” he said. “So if you don’t lock it, maybe you’ll lose a little bit from it going down. But there’s so much more to lose because if the rates go to simply 3%, you’ve just lost a tremendous amount of money.”
Don’t worry if you’re not at the rate-lock stage yet. The low-rate window for refinancing isn’t over.
Mortgage rates are still near record lows and expected to stay there for the rest of 2021. If your current interest rate is in the 4-5% range or higher, you stand to save a lot even as rates are ticking up slightly.
Instead of focusing on timing the market, focus on how a mortgage refinance could benefit you.
“I think people are getting too fixed on the interest rate,” Sklar said. “I think people have to look at their actual savings.”
Someone who wants to refinance, for instance, needs to calculate exactly how much they’ll save by applying for a new loan. If you’re only trimming your payments by a small amount each month, it may not be worth the time and closing costs to take out a new loan.
Or maybe saving month-to-month isn’t your priority. If you want to cash-out home equity or pay off your mortgage early, timing the market for a rock-bottom rate might not be quite as important.
Whether you’re refinancing or buying a home, the right timing always depends on your unique situation.
Rates should stay low for the rest of the year at least, so lock when you’re ready and it makes sense for you to do so.
Lower rates lead to surge in Millennial refinancing
Thanks to low mortgage rates, refinancing activity has jumped in recent weeks — especially with Millennials. In fact, according to new data, nearly a third of all recent Millennial loans were refinances.
Verify your new rate (Jan 23rd, 2021)
Refinancing is big with older Millennials
According to the latest Millennial Tracker from mortgage technology provider Ellie Mae, 31% of all Millennial loans in January were refinances. With older Millennials — those aged 30 to 40 — refinancing was even more popular, accounting for 38% of all mortgage loans for the month.
Of those Millennials refinancing, the average age was 32.6 and the average FICO score 746 — well above the national average of 703. The average appraised value of homes being refinanced clocked in at $335,314.
For Millennials, homeownership is more important than marriage, kids
Refinancing is also growing in popularity amongst all age groups. According to data from the Mortgage Bankers Association, refinances jumped 15.1% last week, accounting for more than 66% of all loan applications. The week’s average 30-year mortgage rate (3.29%) was the lowest on record, according to Freddie Mac.
Here’s what Millennials want in a starter home
Where Millennials are most active
Home prices have been rising across the country, and it’s clear from Ellie Mae’s data that Millennials are having to get creative in where they buy homes. According to the Millennial Tracker, the top cities for Millennials currently include Carlsbad, New Mexico; Eagle Pass and Odessa, Texas; Williston, North Dakota; Clinton, Iowa; and Aberdeen and Brookings, South Dakota.
Joe Tyrrell, chief operating officer at Ellie Mae, predicts this trend will continue as we get further into the year.
“With the purchase power of Millennials increasing and inventory still tight across the country, we expect Millennials to continue to search outside of major metropolitan areas — where there is more inventory — when making their homebuying decisions,” he said.
Verify your new rate (Jan 23rd, 2021)
Get today’s mortgage rates
Are you a Millennial planning to refinance or buy a house? Then shop around and see what mortgage rates you qualify for today.
It’s that time again, where I take a look at a pair of popular mortgage programs to determine which may better suit certain situations.
Today’s match-up: “15-year fixed mortgage vs. 30-year fixed mortgage.”
As always, there is no one-size-fits-all solution because everyone is different and may have varying real estate and financial goals.
For example, it depends if we’re talking about a home purchase or a mortgage refinance.
Or if you’re a first-time home buyer with nothing in your bank account or a seasoned homeowner close to retirement.
Ultimately, for home buyers who can only muster a low down payment, a 30-year fixed-rate mortgage will likely be the only option from an affordability and qualifying standpoint.
So for some, the argument isn’t even an argument, it’s over before it starts.
But let’s explore the key differences between these loan programs so you know what you’re getting into.
What’s Better: A 30-Year Fixed or 15-Year Fixed?
Two of the most commonly utilized home loan products available to homeowners today are the 15-year fixed-rate mortgage and the 30-year fixed mortgage.
They are very similar to one another in the way they function (both offer fixed rates for the entire loan term), but one is paid off in half the amount of time.
That can amount to some serious cost differences and financial outcomes.
While it’s impossible to universally choose one over the other, we can certainly highlight some of the benefits and drawbacks of each.
As seen in the chart above, the 30-year fixed is cheaper on a monthly basis, but more expensive long-term because of the greater interest expense.
The 30-year mortgage rate will also be higher relative to the 15-year fixed to pay for the convenience of an additional 15 years of fixed rate goodness.
Meanwhile, the 15-year fixed will cost a lot more each month, but save you quite a bit over the shorter loan term thanks in part to the lower interest rate offered.
15-Year Fixed Mortgages Aren’t Nearly as Popular
The 15-year fixed is the second most popular home loan program available
But only accounts for something like 15% of all mortgages
Mainly because they aren’t very affordable to most people
With monthly payments around 1.5X the 30-year fixed
The 30-year fixed-rate mortgage is easily the most popular loan program available today.
Around 70% of all mortgages are 30-year fixed products, whereas the percentage of mortgages that are 15-year fixed loans is roughly 15%.
While this number can certainly fluctuate over time, it should give you a good idea of how many borrowers go with a 30-year mortgage vs. 15-year mortgage.
If we drill down even further, about 90% of purchase mortgages are 30-year fixed loans, and just about six percent are 15-year fixed loans. But why?
Well, the simplest answer is that the 30-year mortgage is cheaper, much cheaper than the 15-year, because you get twice as long to pay it off.
Most mortgages are based on a 30-year amortization, whether they are fixed or not (even ARMs), meaning they take 30 full years to pay off.
The 30-year fixed is the most straightforward home loan program out there because it never adjusts during this industry standard 30-year term.
The lengthy mortgage term allows home buyers to purchase relatively expensive real estate without breaking the bank, even if they come in with a low down payment.
It also means paying off your mortgage will take a long, long time…
In short, it’s safe and easy to wrap one’s head around, not to mention affordable due to that long loan term, and as such very popular.
This is why it’s heavily advertised and touted by most housing counselors and mortgage lenders alike.
With the 30-year, you can afford more house, which explains that 90% market share when it’s a home purchase.
Meanwhile, the 15-year fixed-rate market share is significantly higher on refinance mortgages because borrowers don’t want to restart the clock once they’ve already paid down their loan for a number of years.
Well, at least if you’re intent on paying off your mortgage at some point in this lifetime.
Despite the overwhelming popularity, there must be some drawbacks to the 30-year mortgage, right? Of course there are…
15-Year Mortgage Rates Are Lower
15-year mortgage rates are always lower than 30-year rates
How much lower will depend on the spread
It fluctuates based on the economy and investor demand
May find that rates are 0.50% – 0.75% cheaper at any given time
First and foremost, you pay a premium for a 30-year mortgage vs. a 15-year mortgage in the form of a higher interest rate, even though both offer fixed rates.
Simply put, because you get more time to pay off the mortgage, there is a cost associated.
After all, mortgage lenders are agreeing to give you a fixed interest rate for double the amount of time, which is certainly a risk for them, especially if interest rates rise significantly during that period.
For that reason, you’ll find that 15-year mortgage rates cost quite a bit less than those on a 30-year loan product.
In fact, at the time this was written, mortgage rates on the 30-year fixed averaged 3.75% according to Freddie Mac, while the 15-year fixed stood at 3.22%.
That’s a difference of 0.53%, which is certainly very significant and should not be overlooked.
In general, you may find that 15-year mortgage rates are about 0.50% – 0.75% lower than 30-year fixed mortgage rates. But this spread can and will vary over time.
I charted 15-year fixed mortgage rates since 2000 using Freddie Mac’s June average, as seen above.
Since that time, the lowest spread compared to the 30-year was 0.31% in 2007, and the highest spread was 0.88% in 2014.
In June of the year 2000, the 15-year mortgage rate averaged 7.99%, while the 30-year was a slightly higher 8.29%.
So the 15-year has been enjoying a wider spread lately, though that could narrow over time.
Monthly Payments Are Higher on 15-Year Mortgages
Expect a mortgage payment that is 1.5X a comparable 30-year fixed
Not a bad deal considering loan is paid off in half the time
Just make sure you can afford it
Since there won’t be an option to make smaller payments
While the lower interest rate is certainly appealing, know that the 15-year fixed-rate mortgage comes with a higher monthly mortgage payment because you have 15 fewer years to pay it off.
If we consider a $200,000 loan amount, which isn’t necessarily that large, the monthly mortgage payment would be $476.19 higher on the 15-year mortgage because it’s paid off in half the amount of time.
So despite the lower interest rate on the 15-year fixed, the monthly payment is still significantly higher.
Take a look at the numbers below, using those Freddie Mac average mortgage rates:
30-year fixed payment: $926.23 (interest rate of 3.75%) 15-year fixed payment: $1,402.42 (interest rate of 3.22%)
Loan Type
30-Year Fixed
15-Year Fixed
Loan Amount
$200,000
$200,000
Interest Rate
3.75%
3.22%
Monthly Payment
$926.23
$1,402.42
Total Interest Paid
$133,442.80
$52,435.60
This means loan amounts might be limited for those who opt for the shorter term.
Okay, so we know the monthly payment is a lot higher, but wait, and this is the biggie; you would pay $133,442.80 in interest on the 30-year mortgage over the full term, versus just $52,435.60 in interest on the 15-year mortgage!
That’s more than $80,000 in interest saved over the duration of the loan if you went with the 15-year fixed as opposed to the 30-year mortgage. Pretty substantial, eh.
You’d also build home equity a lot faster, as each monthly payment would allocate much more money to the principal loan balance as opposed to interest.
But there’s another snag with the 15-year fixed option. It’s harder to qualify for because you’ll be required to make a much larger payment each month, meaning your DTI ratio might be too high as a result.
So for a lot of borrowers stretching to get into a home, the 15-year mortgage won’t even be an option.
Most Homeowners Hold Their Mortgage for Just 5-10 Years
Consider the fact that most homeowners only keep their mortgages for 5-10 years
So the projected savings of a 15-year fixed mortgage
May not actually be fully realized over the shorter term
But these borrowers will still whittle down their loan balance a lot faster in the meantime
Now obviously nobody wants to pay an additional $80,000 in interest, but who says you will?
Most homeowners don’t see their mortgages out to term, either because they refinance, prepay, or simply sell their property and move. So who knows if you’ll actually benefit long-term?
You may have a well-thought-out plan that falls to pieces in 2-3 years, and those larger monthly mortgage payments could come back to bite you if you don’t have adequate savings.
What if you need to move and your home has depreciated in value? Or what if you take a pay cut or lose your job?
Those larger mortgage payments will be more difficult, if not impossible, to manage each month.
And perhaps your money is better served elsewhere, such as in the stock market or tied up in another investment, one that’s more liquid, which earns a better return.
Make 15-Year Fixed Sized Payments on a 30-Year Mortgage
If you can’t afford the payments on a 15-year fixed home loan
Or simply don’t want to be locked into a shorter-term mortgage
You can make larger monthly payments voluntarily
That pay off your loan in half the time or close to it
Even if you’re determined to pay off your mortgage, you could go with a 30-year fixed and make larger payments each month, with the excess going toward the principal balance.
This flexibility would protect you in periods where money was tight, and still knock several years off your mortgage, assuming larger payments were made fairly regularly.
And there are always biweekly mortgage payments as well, which you may not even notice leaving your bank account.
It’s also possible to utilize both loan programs at different times in your life.
For example, you may start your mortgage journey with a 30-year loan, and later refinance your mortgage to a 15-year term to stay on track if your goal is to own your home free and clear.
In summary, mortgages are, ahem, a big deal, so make sure you compare plenty of scenarios and do lots of research (and math) before making a decision.
Most consumers don’t bother putting in much time for these mortgage basics, but planning now could mean far less headache and a lot more money in your bank account later.
Pros of 30-Year Fixed Mortgages
Lower monthly payment (more affordable)
Easier to qualify at a higher purchase price
Ability to buy “more house” with smaller payment
Can always make prepayments if wanted
Good for those looking to invest money elsewhere
Cons of 30-Year Fixed Mortgages
Higher interest rate
You pay a lot more interest
You build equity very slowly
If prices go down you could fall into an underwater quite easily
Harder to refinance with little equity
You won’t own your home outright for 30 years!
Pros of 15-Year Fixed Mortgages
Lower interest rate
Much less interest paid during loan term
Build home equity faster
Own your home free and clear in half the time
Good for those who are close to retirement and/or conservative investors
Cons of 15-Year Fixed Mortgages
Higher payment makes it harder to qualify
You may not be able to buy as much house
You may become house poor (all your money locked up in the house)
Could get a better return for your money elsewhere
