Quick Introduction to 15 Year Fixed Mortgages
Homebuyers who aren’t interested in making mortgage payments for 30 years in a row can look into getting a 15-year fixed-rate mortgage. While these mortgage products aren’t as common as 30-year fixed-rate mortgages are, they are an alternative that can offer homeowners several benefits.
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15-Year Fixed Mortgage Rates
Anyone who qualifies for a 15-year fixed-rate mortgage makes fixed payments over the course of 180 months, instead of the 360 months with a 30-year fixed-rate mortgage. Since your mortgage rate is fixed, both your interest rate and your mortgage payment remain the same every month for the life of the loan.
Historical 15-Year Fixed Mortgage Rates
The U.S. economy fell into a recession in the early ‘90s following a sharp increase in the cost of gasoline and a crisis involving a number of savings and loan associations. By 1992, the recession had ended and the average annual rate on 15-year fixed mortgages was 7.96%. Annual mortgage rates in the late 1990s hovered around 7%, on average.
The housing bubble burst in 2007. That year, the average annual rate on 15-year fixed mortgages was 6.03%. As the country plunged into another recession, mortgage rates continued to fall. The lowest average annual mortgage rate on 15-year fixed mortgages since 1991 was 2.66%. This occurred in both late 2012 and in April 2013. As of June 2016, the average 15-year fixed mortgage rate was 2.84%.
15-Year Fixed Mortgage Rates
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When 15-year fixed mortgage rates are low, owning a home seems more affordable. As rates fall, the demand for housing generally rises and so do home prices.
How 15-Year Fixed Mortgage Rates Stack Up Against Other Mortgage Rates
Folks who take on 15-year mortgages don’t pose as much of a threat to lenders as people who take on 30-year mortgages. Since they have a shorter payoff period, borrowers with 15-year fixed-rate mortgages are considered less likely to fall behind on their mortgage loan payments. That’s why these mortgage rates tend to be lower than 30-year fixed mortgage rates.
In general, you’ll find that fixed mortgage rates are higher than adjustable rate mortgage rates. Anyone who wants a variable rate mortgage will have a lower mortgage rate at the beginning of their loan term. But over time, mortgage rates on adjustable rate mortgages increase and so do the monthly payments the homeowner has to make. With a 15-year fixed-rate mortgage, the interest rate may start higher but it stays consistent for the entire term of the loan.
15-Year Fixed-Rate Mortgage Rate Quotes
Mortgage rate quotes are estimates that let homebuyers know what sorts of interest rates and APRs (the amount of interest they’ll pay per year, plus the cost of fees) they’re eligible for. A mortgage rate table like the one above lets you compare the interest rates that different companies are offering.
Rate quotes combine a variety of personal details - such as the size of a homebuyer’s down payment and his or her credit score - to provide homebuyers with some insight into what getting a 15-year fixed-rate mortgage could cost them. By comparing mortgage rates, homebuyers can also get a sense of how high their loan origination fees (mortgage loan application processing fees) will be.
How to Get a Low 15-Year Fixed Mortgage Rate
If you want to lower the cost of homeownership, you can start by finding a way to lower your mortgage rate. The higher your mortgage rate, the more interest you’ll pay over the life of your home loan. That’s why it’s important to compare mortgage rates before committing to working with a specific lender.
The homebuyers who qualify for the lowest mortgage rates tend to have good credit scores. According to the FICO scoring model, you’ll likely need to have a credit score of at least 740 if you want access to the best rates. Of course, the exact credit score you’ll need to qualify for a 15-year fixed-rate mortgage will depend on the mortgage lender you choose to work with.
If your credit score isn’t as high as it could be, it might be a good idea to work on improving your credit before you apply for a mortgage. Eliminating debt, paying bills every month on time and in full and keeping your credit utilization ratio (the amount of credit you’ve used relative to your credit line) below 30% are all things you can do to boost your credit score and put you in the best position to get a favorable mortgage rate.
While it’s possible to qualify for a mortgage with a low credit score (even if it’s below 620), it’ll be more challenging and could result in a high interest rate. If this is your situation, your best bet might be to go for an FHA loan or a USDA loan.
Other factors that have an impact on mortgage rates include the number of mortgage points you’re paying for and the amount of money you’re willing to put down. One mortgage point can lower your mortgage rate by as many as 25 base points. And if you make a large down payment (industry standards say you should put down at least 20% to avoid paying for private mortgage insurance), you’ll likely end up with a lower mortgage rate.
The amount of debt you’re carrying can also affect the mortgage rate on your 15-year fixed mortgage loan. If you’re using a large percentage of your paycheck each month to pay off debt and your debt-to-income ratio is 36% or higher, you might get stuck with a high mortgage rate. In the worst case scenario, a mortgage lender could reject your mortgage application altogether, assuming that you can’t afford to take on additional debt.
Taxes and 15-Year Fixed-Rate Mortgages
If you’re a homeowner with a 15-year fixed-rate mortgage, you can deduct the mortgage interest you’ve paid on your income tax returns, if you meet certain conditions.
Generally, you cannot get a deduction for your paid mortgage interest if you don’t itemize your deductions (unless your state lets you deduct mortgage interest on your state income tax return after you’ve taken the standard deduction on your federal return). And if you’re someone with a high net worth and you’ve taken out a mortgage loan with a value above $1 million, you can’t qualify for the mortgage interest deduction either.
If you haven’t taken on a jumbo loan and you’ve decided to itemize your deductions, you might be able to take advantage of an additional tax deduction if you have a home equity loan. The IRS allows homeowners to deduct their mortgage interest on up to $100,000 of home equity debt.
It’s important to keep in mind that your tax savings will likely be low if you’ve got a 15-year fixed-rate mortgage. Since you’ll be paying less interest than someone with a 30-year fixed mortgage loan, you’ll have less interest to deduct. But in the long run you are saving money by paying less interest.
Refinancing Your 15-Year Fixed-Rate Mortgage
By taking on a 15-year fixed-rate mortgage, you’ll be taking on a loan with a smaller mortgage rate attached to it (compared to the 30-year fixed-rate mortgage). You’ll also be paying off your mortgage and building home equity at a faster rate.
If your 15-year fixed mortgage rate isn’t as low as you’d like it to be – or mortgage rates have fallen since you were approved for your mortgage – you can refinance your loan in order to try and get a better rate. But a lender will have to approve you for a refinance, meaning that you’ll have to complete a lot of paperwork, pay fees and apply for a new loan all over again.
By refinancing your 15-year mortgage loan, you’ll also be extending your repayment period by another 180 months. If you’re only a few years away from paying off your mortgage, refinancing might not make much sense. On the other hand, if your circumstances have changed since you applied for the 15-year mortgage and you’d like lower monthly payments, you can refinance to make your mortgage term longer. Just remember you will pay more money in interest in the long run if you do that.