Best 15-Year Mortgage Rates | December 2022
A 15-year mortgage will allow you to build equity faster and save a lot on interest.
Compare 15-year mortgage rates from lenders in your area. Check rates with multiple mortgage companies to see which one offers the best terms.
How Do Mortgages Work?
A mortgage is a type of loan that you can use to buy real estate, often a home. The home you buy using a mortgage serves as collateral for the debt. This lets people use mortgages to borrow large amounts of money because securing the loan with the home you buy reduces the lender's risk.
Because homes are so expensive, mortgages typically have very long terms. Many people see 30-year mortgages as the standard, but 15-year mortgages are also very popular.
When you apply for a mortgage, the lender will consider many factors, including your income, credit score, and current debts. They'll also appraise the home you plan to buy to make sure it is sufficient to act as collateral for the mortgage.
How do Lenders Set Mortgage Rates?
Comparing mortgage rates can be a challenge. There are many factors that influence the rates that lenders charge, and those rates directly impact how much you have to pay for the mortgage.
Interest rates for everything from savings accounts to home loans are affected by major benchmark rates. One of the primary benchmark rates in the United States is the Federal Funds Rate. The Federal Funds Rate is the interest rate that banks use when lending money to each other overnight.
The Federal Reserve manipulates the Federal Funds Rate to help enact its economic policy. When the Fed wants to increase spending, it reduces the rate. If the Fed wants to slow down inflation, it increases the Federal Funds Rate.
Higher Federal Funds Rates correlate to higher interest rates on mortgages. The lower the Federal Funds Rate, the lower your mortgage rate will tend to be.
Banks set different rates for individual loans. One of the primary things that lenders look at when setting mortgage rates is the borrower's credit score. If you have strong credit, or have a cosigner with excellent credit, you'll get a lower interest rate than someone with poor credit. You'll also likely get a lower interest rate if you buy a cheaper home. Loans that exceed the conforming loan maximum for your area (called jumbo loans) usually carry higher rates.
15-Year Mortgage Rates vs. 30-Year Mortgage Rates
Longer-term mortgages are popular because the longer amortization period typically results in a more affordable monthly payment. While shorter loans typically have higher monthly payments, the total interest cost can be dramatically lower. That means you'll save money in the long-run with a 15-year mortgage.
One of the primary advantages of a 15-year mortgage, when compared to a longer loan, is the interest rate. Current 15-year mortgage rates are noticeably lower than 30-year, fixed-rate mortgage rates.
A lower interest rate means that you'll pay less interest each month. The shorter term also leaves less time for interest to accrue. That can help you save money over the life of the loan.
Why do 15-year mortgages have a lower interest rate?
One of the primary factors that influence the interest rate of a loan is the risk to the lender. That's why lenders look at things like your credit score when you apply for a loan and use your credit to determine your interest rate.
The higher the risk that you'll default on your loan, the more interest the lender will charge and the more you'll pay over the life of your loan. Lower risk borrowers secure lower rates and pay less in interest.
With a 15-year mortgage, you'll take half as long to repay your mortgage. That means half as much time for something to go wrong, causing you to miss payments or default on the loan. Lenders compensate you for reducing their risk by reducing the loans' interest rate.
How Does the Interest Rate of a Mortgage Affect the Cost of the Loan?
The interest rate of a mortgage has a significant impact on your monthly payment and the loan's total cost.
Consider two 30-year mortgages for $400,000. One has an annual percentage rate (APR) of 4%, while the other's APR is 3%.
The loan with a 4% APR will require a monthly payment of $1,910 for a total cost of $687,478 over the life of the loan. The loan with a 3% APR will cost $1,686 per month for a total cost of $607,110, saving you almost $80,000 in total.
Keep in mind that 15-year mortgages have lower interest rates and leave less time for interest to accrue, meaning the overall savings will be higher. However, the monthly payment will be higher for a 15-year mortgage than a loan with a longer term.
15-year Fixed-rate mortgages vs. 15-year adjustable-rate mortgages
When you apply for a loan, you can usually choose between a fixed interest rate and an adjustable-rate mortgage (ARM).
With a fixed-rate mortgage, the interest rate will never change. You can know exactly how much you'll pay each month for the entire life of the loan.
You'll typically see adjustable-rate mortgages advertised as 5/1 ARMs, 7/1 ARMs, or similar. The first number indicates the initial interest rate lock period. Once you get the loan, the interest rate won't change until the lock period ends. The second number shows how frequently the interest rate can change after the lock period expires.
For example, with a 5/1 ARM, the interest rate remains fixed for five years then can change yearly.
15-year fixed mortgage rates are typically higher than the starting rate for an ARM. That means that a 15-year ARM will, at first, have a lower monthly payment than a 15-year fixed-rate mortgage. However, once the rate lock period ends, the interest rate on the ARM could increase. If that happens, your payment will also rise.
In general, a 15-year, fixed-rate mortgage is good if you want the stability of fixed payments. An ARM is good if you plan to pay the loan off quickly, expect to move out of the home within a few years, or you are comfortable with the potential for your payments to increase.
How Does the Term of Mortgage Affect the Cost of a Loan?
Before you opt for a 15-year mortgage, you should understand how the term of a loan impacts the cost of the mortgage.
In general, the shorter a loan's term, the higher the payment has to be. For a simplistic example, imagine a friend has loaned you $500.
If you want to pay them back in 50 weeks, you have to pay monthly them $10 per week. If you want to pay them back in 25 weeks, you have to pay them $20 each week.
While this example ignores interest, it illustrates how a 15-year mortgage will demand higher payments than a 30-year mortgage.
While the higher payment can be a drawback, 15-year mortgages are cheaper than 30-year mortgages overall. On top of the lower mortgage rates for 15-year loans, the shorter term also leaves less time for interest to accrue, saving you even more money.
Pros and Cons of 15-Year Mortgages
There are pros and cons to 15-year mortgages, and it's important to consider them before you decide on the type of loan you should get.
- Save money in the long run compared to a 30-year mortgage.
- Build equity more quickly
- It makes refinancing in the future easier as you'll have a lower loan-to-value ratio.
- Opportunity cost: you may be able to invest the money you put toward higher monthly payments and make more than you save from the shorter loan
- Fewer homes will be affordable due to the higher monthly payment.
- Less budget flexibility
How to Decide Between a 15 Year Mortgage and a 30 Year Mortgage
When choosing between a 15-year fixed mortgage and a 30-year fixed-rate mortgage, you need to consider a few factors.
First, think about affordability. 15-year loans have higher monthly payments than 30-year loans. If you can't afford the payment on a 15-year mortgage, you'll be better off with a 30-year loan.
Relatedly, think about how the higher payment fits in your monthly budget. If you lose some of your income, will you be able to continue making payments? While a 15-year, fixed-rate mortgage will save you money in the long run, the flexibility offered by the 30-year loan's lower payments can make it easier to weather a loss of income without falling behind on your debts.
Another thing to think about is opportunity cost.
Current 15-year and 30-year mortgage rates are very low. There's a good chance that if you invest your money, you'll make more than you'd save by putting that money toward the higher payments required by a 15-year loan.
If you're into investing, it may be worth your time to choose a mortgage with a longer term, as long as you have the self-control to invest the money that would have gone toward the 15-year mortgage's payment. There's a good chance that you'll come out ahead. If you're the type that is likely to spend the money, the forced saving of a 15-year mortgage can help you build wealth more effectively.